Q2 2023 Vicor Corporation Earnings Call
We need to hold.
[music].
Welcome everyone to today's webinar in fact, the <unk> earnings results for the second quarter ended June 30.
2023, My name is Robin and I read you correctly.
Today during the presentation all attendees will remain on listen only mode. If you acquire sits at that time. Please press the message in the chat box.
With that I would like to hand, the call over to Jim Smith, Chief Financial Officer. Please proceed.
Thank you good afternoon, and welcome to <unk> Corporation's earnings call for the second quarter ended June 30th 2023, I'm, Jim Schmidt Chief Financial Officer, Brian in Andover, with Patricio <unk>, Chief Executive Officer, and Phil Davies, Corporate Vice President Global sales and marketing.
After the market closed today, we issued a press release summarizing our financial results for the three months and six months ended June 30th.
This press release has been posted on the Investor Relations page of our website www dot by core powered dot 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 the copyrighted property of <unk> 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 995.
Except for historical information contained in this call the matters discussed on this call, including any statements regarding current and planned products current and potential customers potential market opportunities expected events and announcements at our capacity expansion as well as management's expectations for sales growth spending and <unk>.
<unk> ability 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 in or implied by any of our remarks today.
The risks and uncertainties, we face are discussed in item one a 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.
Bright scholar 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 will now turn to a review a review of our Q2 financial performance after which Bill will review recent market developments and for Tradeshow, Phil and I will take your questions in.
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 our upcoming Form 10-Q for additional information.
As stated in today's press release <unk> recorded total revenue for the second quarter of $106 7 million.
Up nine 1% sequentially from the first quarter of 2023 total of $97 8 million.
And up four 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 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.
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 three 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 500 570 <unk>.
$1 626000.
And 816000, respectively totaling approximately $3 million.
For Q2, we recorded operating income of $17 9 million representing.
Representing an operating margin of 16, 7%.
Turning to income taxes, we recorded a tax provision for Q2 of approximately $2 5 million reps.
Representing an effective tax rate for the quarter of 12, 9%.
Net income for Q2 totaled $17 1 billion.
GAAP diluted earnings per share was <unk> 38.
Based on a fully diluted share count of $44 million million Nighthawk <unk> 6000 shares.
Fully diluted EPS increased approximately 52% sequentially compared to 25 in the first quarter of 2023 and increased approximately 58% from 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 in Q2.
Accounts receivable net of reserves totaled $63 8 million at quarter end with Dsos for trade receivables at 43 days inventories.
Inventories net of reserves decreased 7% sequentially to $106 6 million.
Annualized inventory turns were $2 one.
Operating cash flow totaled $19 million for the quarter.
Capital expenditures for Q2 totaled $8 5 million.
We ended the quarter with the construction in progress balance primarily for manufacturing equipment of approximately $23 million.
And with approximately $10 million remaining to be spent.
I will now address bookings and backlog Q.
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 Vycor patents.
Covering non isolated bus converters and BMS.
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 devry core by licensees of our patents.
At our ITC case, we are seeking an exclusion order pre.
Precluding importation into the United States of power modules servers, or AI cards that infringe our patents and our district Court case, we are seeking damages for willful patent infringement.
With that Phil will provide an overview of recent market developments and that Pretreat CFO and I will take your questions.
That you limit yourselves to one question and a related follow up so that we can respond to as many of you as possible in the limited time available.
If you have more than one topic to address please get back into queue.
<unk>.
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 brightcove in a unique position with intellectual property to key innovations in power distribution architectures.
Including <unk> 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 vertical vertically integrated chips to lead customers for their qualification.
Our lateral and vertical distribution network provides superior performance for advanced Gpus strengthening strengthening our position as the supplier of high performance power systems and <unk> markets.
In short.
As an earlier generation AI program, using our third generation factories power chipset ramps down.
Fourth generation chipset is expected to start shipping in Q4 into our next generation AI platform and a lateral or lateral vertical CDN.
The lateral vertical PDL will provide nearly 10% higher power system efficiency and superior processor performance.
Advanced processes currently in development to require current levels that can only be supported with vertical power delivery through complex stacked VP CE structures that brightcove pioneered and patented.
With a 300% advanced in current density <unk> fifth generation technology enables a more mature and scalable second generation <unk>, which will soon be key to high performance AI accelerators.
The electrification and autonomy 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 and execution is now the name of the game.
Thank you <unk>, Jim and I will now take your questions.
So operator, we're ready for questions now.
Yeah.
Ron Your Q&A session you may now begin.
A quick question on the Webex. Please click on the right hand icon at the bottom of your screen.
To answer your question on the phone please press star.
We will pause for a moment to assemble the queue.
And the first question is coming from Quinn Bolton. Please proceed your line is open.
Bill. Thanks, So can you guys here.
Okay great.
First question is can you guys share any more details on the <unk> lateral power distribution design that you mentioned in the press release for Nu.
Hi platform that ramps in the fourth quarter can you say that the new customer you've worked with this customer previously could you give us any sense of what our consumption for this party.
<unk>.
High power card range, our authority any details you can share would be would be very helpful.
We think costs are.
Yes.
Okay.
New.
Jaret action.
For the.
The existing customer.
And is.
A chipset.
That can be deployed.
Either in allowing our PGM.
Which.
Is.
Is.
Substantially handicap.
From.
Power system perspective.
The point that it limits.
Power delivery power capability processor performance.
In that it gives rise.
Two.
Large losses within.
The copper of the substrate.
GPU.
The powers.
This rise too.
Further losses within the C&I itself.
Owing to delineate action saw lateral power delivery apply.
<unk> thousand amp level.
<unk>.
For the chipset.
We can enable a lot of our solution with the same Andy gaps.
Or.
With.
The vertical element using the same chipset.
A lot of our vertical solution, which is unique highly differentiated in that and improve system efficiency.
By about 10%.
<unk> and <unk>.
Removals.
Number of <unk> relating to.
Professor pro forma.
So just I guess, a follow up it sounds like it can be deployed either lateral or lateral vertical can you say is the.
The solution going into production in the fourth quarter is that lateral first with switch lateral vertical sometime next year.
It is likely to be lateral first.
Followed bilateral vertigo.
Great and then you had mentioned sort of.
Real vertical improves efficiency by 10% and I think in the press release, you said that would enable.
101.
Our savings so am I right to be thinking that this AI platform could be consumed nearly 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 call of about 100 watts, which approximately represents a 10% <unk>.
Improvement in system efficiency.
But one should keep in mind that.
While 10% in some respects men ultrasound.
Like a lot.
<unk>.
It is a lot.
In a number of respects.
Some are tax legal and debt.
Would be in effect.
It's somewhat difficult to articulate in sufficient detail in this quarters today.
But whether it's.
The gradients are voltage differentials across.
<unk> field abroad.
It brought about by ladder cross flow across distances.
On a substrate with substantial resistance.
<unk>.
A substantial amount of power.
The self feeding within.
Their substrate that is caused by deposits Apache on the substrate than the silicon <unk>.
What we're really talking about is something we have discussed before you might.
Recall might pointing to these kinds of linear fashion and challenges.
Many many months ago.
Just indicative of.
Fundamental stumbling blocks to what can be accomplished with commercial technology and ease constraints within their al mode powered.
Power distribution network that is collateral.
Understood I'll go back into queue, and let somebody else ask a question. Thank you.
Thank you.
The next question is coming from the line of Jon Zimmerman. Please proceed your line is open now.
Hello.
Hi, John .
Yes.
Yes.
Okay great.
I want to follow up on <unk> question, a little bit.
Regarding got it.
Capital allow there.
Yes regarding the <unk>.
Bob.
Regarding the lateral vertical opportunities thats coming into production in Q4.
Is that a high volume customer or is it more of a lower volume.
Modest volume customer.
So to be clear suggested earlier.
The same chipset, which is a project chipset.
So cost both El Abra Parkdale.
Some castlevania precise with passion as of now is that the lateral and per my passion will go first.
That's the one we're anticipating for Q4 ramp.
I can't tell you why.
Wang.
The other vertigo was going to production but.
<unk> is that it would be after the latter.
But is this going to be significant customer or is this more of an incremental volume.
Thanks.
This is a significant customer.
Alright, great. Thanks.
Excellent okay.
Do you think bookings again rebound strongly upon completion and the qualification of the new factory.
We expect bookings to pick up.
The impact of the year.
The platform, we just referenced ramps.
And.
Because of other contributing elements.
Not only saw which to your point.
Bringing online.
Our first fab.
A strong history, we've had.
Operational challenges and capacity limits actions within the last couple of years with diverse products relying on unique processes.
Our debt to be outsourced.
So common SaaS.
<unk> itself.
It would imply that as we overcome this.
Stumbling blocks in <unk> lax.
And.
Being.
Capable of delivering the kinds of solutions that were unique.
Uniquely equipped.
To provide.
Tom.
Bookings and backlog.
<unk> built back half quite substantially.
I know that may be.
A concern at this point in time in the minds of <unk>.
Shareholders for whether its worth is smart microphone.
Excellent I'll get back in the queue. Thank you so much.
There's one more question coming from Quinn Bolton on the buybacks. Please proceed your line is open.
T J I just I wanted to ask you about the recent.
Actions legal actions against Delta electronics in Pakistan.
Yes, both with the ITC and in the <unk>.
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.
Yes, I would like to know what do you think.
Potential effect on your relationship with this GPU manufacturer might be to the extent youre going after one of one of its power module suppliers.
So im not going to be specific obviously is us.
As implied by.
Yes public disclosures.
You can.
The complaint.
At the ACC.
They're difficult to get to it.
Find out for yourself.
We do have.
Licensees of the technology.
And those licensees.
Sure.
Were prudent enough to a prior license.
Put themselves in a position where they could.
Source products, including <unk> that was otherwise infringe.
<unk>.
Without.
Incurring the risks of infringement, so you should not assume.
When it comes to the.
Santa.
Our AI Oems.
That all in the same boat.
One.
Number one is not because it's a part of the license the other ones.
<unk>.
We're going to have to deal with.
The issues that arise when for manufacturers as Google says they are.
Our coffee.
Products.
<unk>.
Our covered by effective intellectual property.
Understood. Thank you and just just to clarify.
Andover.
Quality and 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 customer customer qualifications as you got into the third quarter here.
Is that customer qualification.
Is that still on Frac that was first brought it. Thank you.
With that customer basis and.
And we've had praise for.
We are doing.
The progress with respect to it and going back to the first part of your question.
Yes, we are on track to.
It may complete molecules.
In.
September .
Late August .
September so essentially starting about one month from now.
We're going to be able to play that.
Any chip.
Excellent. Thank you very much for St. Joe.
Right.
Alright, so I will start taking questions on the phone and now if you press the star and three please state your name and company name before asking your question first Sandy Lang is open now. Please proceed.
Hi, <unk> this is Don Mckenna D B mechanics.
Good afternoon.
I wanted to follow up on the.
The <unk> chipset coming on.
And when we're talking now we're roughly backlog is roughly.
Six months worth of current run rates.
What are you quoting for lead times at this point in time and do you expect if you are 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.
But we expect to get additional backlog.
Maybe.
You want to comment on that I think that's exactly right, we have existing backlog and our plan is to obviously begin to ramp with that particular backlog and then in Q3 Q4, we'll get.
Increased bookings for the follow on.
2024.
Alright, and have you already seen because your backlog is down now or are you quoting shorter lead times and is that in turn.
Generated additional.
Sure.
So let's put things in perspective, we're still playing catch up we're going to be.
Completing the catch up play.
This quarter.
But.
We're still with respect to <unk>.
At this hour place quite some time ago because of the capacity bottlenecks that.
Again, we are aware of our reminds us of earlier in the call.
We're still playing catch up so while that is the case and thats going to count on that relatively soon.
Good times are still long, but once.
We get caught up and down which is eminent and once we have the benefit of being in control of our destiny with.
Our first half.
Then lead times will come down.
I guess the concern is when you look at.
Bookings this past quarter, we're somewhere in the 50.
$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 size protection.
Again to put things in context, if we go back quite some time.
<unk> and <unk>.
<unk> with respect to bookings and we pointed this out a year and a half ago. It with very long lead times and capacity bottlenecks.
Also in light of general industry currently issuance.
We were.
<unk> book to be rashes of nearly two which are obviously not sustainable so.
There is a process that has been going on for some time with a timescale on literally a year year and a half.
Paul building up the backlog now, bringing it back down.
Our towards sustainable level, where additional bookings will bring.
Bringing the backlog back up.
In terms of our turns business and.
The elasha shift between the backlog and projected revenues.
We're right now we're not in a comfortable position.
Obviously, we have a lot more backlog a year ago, but again that was an anomaly rather than.
A sustainable condition.
Understood.
Sure you can appreciate our concern.
<unk> business, if you will when we see that the incoming orders there is so much lower than the revenues for the quarter just hate to see any any dips along the way.
Hum.
Tom.
I sympathize with.
In effect.
The concern of the nervousness is certainly justifiable.
Again.
It's very important.
When these low cash us of disguise has happened over the last year year and a half take place.
To being a safe harbor with an objective view.
<unk>.
Relevant factors right. So.
As pointed out by field in his earlier comments.
<unk> is uniquely positioned.
Because of the convergence of technology trends that we anticipated invested in.
<unk> are uniquely equipped to exploit.
Dom.
And that's the.
Safe Harbor that we're operating from.
And Thats a great basis for looking forward as suggested in the micros the press release for sustained growth.
Improving profitability.
Yeah.
Thank you.
Alright, So I will now take the second question. Please.
Please state your name and company name before asking your question. Your line is open now.
Hi, good afternoon, and thank you for taking my question John gentlemen, Thanks Vijay asked.
I was wondering if there was any more color or detail behind why the lateral with implementation of the products.
But it will be we'll be launching first has there been a delay in the lateral and vertical.
Any more commentary there.
Im sorry, John I didn't fully get your question that you are coming through a little bit muffled.
Hi can you hear me better now.
Yes.
Wondering why the lateral only version of this new product is launching service.
Compared to the higher performing lateral vertical product.
So the lateral version.
Even though.
The start of its developer was.
Over a year after that.
The stock.
Paul develop first based on <unk>.
Multi <unk> multi phase quote unquote competitive alternatives.
Demos.
In fact predicated on the same kinds of PVM that.
The multi phase multi source solutions.
In effect confined to.
But because of the fact that.
If developments, even though it was delayed sales started.
Earlier in time.
As Gavin through the finish line.
<unk>.
Paul.
<unk> vast PVM.
Which we have.
Projected to have the benefits is proving out to half.
But because of the fact that that's only just started.
About six seven months ago from a development perspective.
Evs.
Sure.
Following on the yields of a lateral vertigo solution that is being factored in.
Nearly a year earlier.
But it's rapidly catching up and is proving out to be as good as we as advertise it to be.
And in my belief because of its <unk>.
Stronger.
<unk>.
Again in terms of not just power system performance, but processor performance.
We'll soon I believe play.
Catch up and become <unk>.
Yeah.
So shar choice.
Jon It's Keith.
You said this earlier, it's exactly the same chipset, which is key for the lateral and the lateral vertical it's a much much improved layout better PD and lateral vertical.
Placing one of the VTS underneath the processor that gets the benefits and we can do that because the packaging is very thin.
Very thermally adept so.
It's got a lot of advantages being the same chipset that gets qualified for the lateral.
Can I ask you actually launch the lateral and vertical product with the same chipset does that get you higher dollar content.
Per.
I'd card for this sweet spot.
The chipset theres being quoted for over a year now and that.
That chipset is a price fixed price and that goes for lateral or lateral vertical implementations, but Seattle implementation, which has been recognized as the cost of earlier, but did not get Sofia assay later.
The leaves us a lot more.
Okay.
Okay, great. Thank you.
And Tom so.
Dissipated program.
Performance.
Got it thank.
Think of the lateral product.
Similar to Jonathan replacements for the existing multi cloud solutions.
And sort of maybe your lateral vertical koenigsberg higher performance high precision high efficiency, SKU, which may launch later.
So the lateral solution using the same chipset is not for the quarter dropping because.
With different components.
The layout itself is different but its shares.
A common level of PDF.
Fundamentally there.
The floor planning that had been done which for planning was again predicated on a multi source multi pay solution. So yes.
We're fasting effect.
Within the same general floor plan.
Fitting in.
Solution, which is better than may expects much lower noise.
Better performance in general.
And the gap by.
If allowed a PDF so that and the gap is a comment there I mean as a <unk> that can be overcome.
As Phil pointed out of the monitor golf VI.
Taking.
While the Atms.
So for US the primary high current output.
And redeploying it to.
Into a vertical.
Our position.
<unk> it close to the center of the GPU and.
And in that low cash them.
It can do.
To do wonderful things in terms, so not just reducing <unk> loss for the primary output, but also.
Slash the PJM losses in the secondary and tertiary apples that are also very icon.
By large percentages.
And with that.
Improve overall system performance.
So the outcome of all this effort, which started earlier, but in Rguest software until six months ago.
Will it be.
Superior system with better performance.
Understood I'll jump back queue. Thank you.
And next question is coming from the line of John Dillon. Your line is open.
Can you hear me a little better now yes.
Okay great.
The last conference call you discussed.
The lateral vertical that you've got a number of designs that were coming out.
I believe one sounds like it's your was your high volume customer existing customers doing a re spend that you talked about.
The.
Other designs that were supposed to come out or there is still coming out.
And I think coming out as vertical lateral are vertical.
Yes, so John those are lateral designs the process occurrence there are lower.
They're slightly lower performance applications different types of workloads and yes, the customer count there is about the same four to five customers, but those of lateral implementations, but again using basically the same technology.
And you expect those.
Production in the third quarter also.
No I expect those to be in production, mostly like Q1 of next year.
Okay.
Would we expect those things to do in bookings on orders.
Our branding will be through the next quarter for those.
We have a small amount of backlog maybe a few million dollars. Just 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 is there.
Hi, there.
We're talking about correct correct.
Excellent.
Okay and then.
When do you expect <unk> production planning.
We expect to have demo systems in Q4.
Four in terminal.
By the action and begin to share with some select customers in Q1.
When would you expect that your customers would be able to.
Then ship those to their customers.
Q2, Q3 next year.
It just has shrunk.
From.
Thoughts on the availability to customers their own design cycle, which has cut its tank cost center.
Yes.
In round numbers a year, so yes I'm.
You should not expect we should not expect.
<unk> to be a contributor to revenues in <unk>.
In 2004 I think.
There is always professional with respect to GE contributing to revenues.
Is 25, now having said that.
I will say the following.
<unk>.
<unk> of the shareholders' meeting.
With five G.
We are enabling a much more scalable.
Sure.
Designing process.
And I do expect to have in number.
<unk>.
Northern border gas shows that <unk> had.
Challenges.
With.
Hi card solutions.
Well once again <unk>.
Compared to those being tracing archrock.
Terms of our first generation vertical power delivery I do expect those to run.
Into travel.
Because they are immature ways of enabling a vertical power delivery system.
And with our <unk> technology, we have a much better way of.
Implementing bpd without stacking.
<unk> see some level, so that could be <unk> sometime next year.
In 2000 and for where we could intersect I'll come to that ask you are customers that find themselves once again travel because of.
A variety of technical or IP challenges.
Gotcha Gotcha.
So we may see a competitor come out with a vertical system, but their IP challenges.
Clinical challenges that you think you can run into.
They have both picking up Ross and Bev.
IP crops.
No I wouldn't.
And again, it's a process that gap with nvme.
Well I'll, let a customer go with a solution like that if their technical and IP problems.
Well so to some extent.
I think the industry is.
Going to go through.
<unk> right because.
Whether it's a technical issue.
Its intellectual property issue.
Uh huh.
Oems are dependent on the best suppliers.
To be able to follow through.
Our solutions that can be shipped.
And that work technically.
R R.
Work in terms so.
Ownership of intellectual property that is.
Half of their solution.
And failure to be able to support the customer an OEM customer on either one of those trials.
Sure.
He is going to.
Being about it evolution in the industry, that's my expectation.
Great. Thank you very much.
Alright, So I will open the next phone question now. Please proceed your line is open.
Hello.
Hello can you hear me.
Yes, Alan Hicks Ainsley capital.
I had a question about.
Factory fully up and running are you going to be able to hit the ground running.
In the fourth quarter for this new customer.
Fully meet their demands.
So to be here.
<unk> as a whole is as being up and running.
In my earlier comments with respect to the turnaround of certain equipment that processes is starting at the end of August .
And into September .
<unk>.
Those capabilities are incremental capabilities that we haven't had.
Investigate integrated.
They are 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.
<unk>.
Capacity.
For which we have made significant.
Investments in <unk>.
Effective in all of the capital equipment.
What you're seeing now.
Being added.
Within the last year year and a half.
Half of that.
We have already been deployed and validated.
So in Q4 do you expect more of a full ramp or really move the needle in revenues.
Well I think we're going to have an app.
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.
Would you attribute that to.
So this is Jim Mccann here, that's a function of leverage associated with the volume increase in volume and also a favorable mix.
And we also have the benefit of lower freight and tariff costs net of the $2 $8 million duty drawback as well as a reduction in outside processing costs all.
All of that added up to improvement in the gross margin.
Increased at all.
Yes increased.
Increased royalties as well.
Okay.
Next question you had.
<unk> last quarter.
What are your royalties this quarter they seem to be ramping pretty much pretty fast over last year.
Is that going to be lumpy or is that can continue to grow.
I think youll see it in the 10-Q, when we file on August 4th.
That is less reserve judgment.
So let's put it this way.
As you've heard us say.
Over the last 15 years, we have made major investments in the hunger is several hundred million dollars.
<unk>.
Technology takes.
<unk> two.
Bring it about.
And thus far what we've seen with respect to.
Yeah.
Yes.
In terms of licensing of intellectual property is still early stage in terms of both.
The number of Oems involved.
And their use of that technology. So we should expect.
To see.
Those numbers go up you used the word lumpy, yes, it could be lumpy at times.
Who will.
As to wait to see how events unfold with respect to the assertion of IP.
<unk>.
The campaign that were embarked upon to make sure that it gets fully respected.
Okay.
Okay. Thank you very much.
And we'll take the next question now. Please proceed your line is open.
Okay.
My question was answered.
Thank you Bill.
Alright, then we will open. The next question. Your line is open. Please proceed.
Patricio can you give us an estimate of the dollar value of the lost sales due to the infringement.
Well, so I'm not sure I shouldn't say, Ken USA I should say will you.
So yes.
I'm not sure I, even can never mind, whether or not it makes sense to go into those kinds of details.
Again, the nvme shoe is.
The first issue.
To be dealt with.
Sure.
It is significant.
And.
But again from Mbm's, we're driving less.
License fee income as well in a growing.
Sure.
Ill.
Sure.
So I do expect that.
The.
The value we have built in IP.
In the next 10 years is going to be a.
A strong contributor to our top line and even more so to our bottom line.
But beyond that very vague statement.
It would be.
We are in the appropriate on me.
To make predictions because there is a variety of scenarios.
<unk>.
A broad range of outcomes and I think we need to take a wait and see attitude.
We do have a very well thought out plan with Bergen the time necessary.
To think it through.
In that respect and we are.
We just began.
Executing so let's wait and see what happens.
Okay fine thank you.
Alright. The next phone line is open now please proceed.
Alright, I will move to the next question your line is open.
We proceed.
Hi, John Tim One thing again I was wondering if you expected margins to stay at.
Current levels organically or is there some part of the claw back then that is changing as you move forward.
Number one.
On a follow up after that.
So I think we just say John as I said in the guidance, we expect gross margins to be approximately flat as well.
There is going to be a declining.
There is going to be a declining rate of duty drawback because part of it was front end loaded recovery of Years' worth of tariffs that would have been paid in the past.
Understood. So the underlying margin should be increasing going forward.
Is that 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 it.
Great.
We're not going to.
Be very quantitative about that beyond the work Jim said at the outset, which is.
We're going to have significant legal operating expenses.
There may be more actions growth.
Sure.
And.
So we need to take a wait and see attitude with respect to <unk>.
The next year.
Understood and then last one for me just the orders for the next generation products that you are 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 and get back to you regardless.
Yes, John this is qualified or not.
No I think the two pretty much line up right because qualification is occurring over the next four weeks and so we're moving forward.
Into Q3, Q4, and the new program. So it's about the same timing timing, so that lines up pretty well.
Understood. Thank you very much.
Okay. The next one is coming from Quinn Bolton Your line is open.
Hey, guys just wanted to ask a quick follow up on this new AI platform that Q4 is that should we think about that as sort of a new SKU or by quarter is sole source due to the fact raised our hopes.
Over time, you can you can convert it to the lateral and vertical solution.
Will there be a second SKU of this this product based on multi phase multi phase in parallel.
Sure that business going forward.
So we've been allocated share of.
And what you might call the baseline platform.
And that fact that again can be supported from a Pos system performance perspective.
Using allowing our PGM Andy Capex it is okay.
Again, we.
We have proven that.
The latter vertical is.
A far superior PVM.
With.
Major.
The.
Improvements in efficiency, we're not talking I mean typically.
Components are power systems.
Within a certain type of Pvs.
Differ by.
One two percentage points of efficiency.
We're talking about is a 10% difference so it dwarfs.
The.
Minimill differ.
Defenses.
Often catheter is different kinds of components right.
Is.
Fundamental difference in the way.
The power system.
Is architected from the <unk> perspective, with major benefits with respect to system performance and you can and.
I can.
In Japan to speculate as to what Oems customers would want to do with that.
Don't know that.
I will know that if it <unk>.
One thing I'd want to say <unk> would be.
Job is to obviously give our customer options and I think the lateral vertical gives the customer a great option in terms of increasing performance.
<unk> Gpus that.
Limited by the lateral PD and so.
Again, it's very important to remember it's about a 100 watt savings per AI card.
Eight of these in a rack system. That's 800 watts of power savings is huge and so you can really start to go after the GPU performance with those savings so.
We've given customer options, we will see what happens.
Understood. Thank you.
And we have our very last question coming from Standalone. Please proceed.
Thanks, guys.
Follow up to Glenn's question.
With this new customer and existing customer I mean that.
It is going initially with vertical and then.
Additionally, with lateral than lateral vertical.
With that customers see an improvement in performance with your lateral solution your lateral length solution really still have.
No.
Problems with resets.
And travelling decline.
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.
Performance.
So they won't see the degradation as much as they are staying with a market based solution.
Yes.
It's it's a better solution, let me put it that way.
Just to be clear the Pts tends to be an equalizer right. If you've got the Napa Handicap a pass through.
Okay.
Play and recap enroll all around.
And Thats really the elephant in the room with C&C gap associated with the <unk>.
Alright, but it sounds like you are.
Your lateral solution lateral only just kind of give a little bit better EDM and existing solution.
Correct in assuming that or hearing that or.
Let me ask it this way I would not expect the differences in performance.
<unk>.
A lot of all multi source multi phase and allow their authorized policies them at these current levels.
To be.
All of the significant gap on the scale of the benefits of RCI in other words the other vertical.
Removes the handicap that is fundamentally limiting.
Policies that capability and emphasize our performance.
Correct I'm trying to understand why the customer would switch from their current multiphase solution your lateral solution in the near term.
They just wait for your lateral vertical.
Because of the latter I guess started earlier, even though I guess that delay.
<unk> got started earlier than the lateral vertigo and they need suppliers.
They need suppliers.
Okay, they need suppliers to gotcha okay.
Okay, and it sounds like just purely the add of the lines.
Okay.
<unk> keeps making improvements I'm just wondering is this really at the end of the line for that.
Sorry, Jonathan.
Did you know at the end of the line for multi phase.
It.
So at the end of the life of multi phase.
Yes.
Power levels at this.
<unk> has been around for a long time and it will not.
Suddenly die.
The pace, but.
You heard me say this before.
It can't keep up.
With.
The performance.
In fact that is policy stem, particularly leveraging our fate.
<unk> components with <unk> step up in <unk>.
Much better performance all around.
Nor can it keep up with.
The industry demands with respect to escalating client requirements are producing volatilities for all the competing AI systems that are under development 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.
Our multi source multi phase can't support.
Clearly as we get into.
With vertical power delivery type of systems.
Past lateral even past a lot of RTL as you get into.
A full vertical system.
<unk> kinds of solutions, a multi phase multi source are going to be constrained.
From.
Complexity these challenges.
We call first generation with PPD, which FICO pioneer balances.
We have left behind with our <unk> approach, which makes the whole <unk> solution.
Much simpler much faster and much more cost effective.
Sure.
So.
Andy caps.
Different level standing in the way of multi phase multi.
A multi face.
Power conversion methodology, the averaging down as opposed to the car Multibank action is.
Also the PGM and.
And then these are bpd element to it with related IP issues that.
As all systems.
Okay.
So with the higher current levels, you really don't expect to see more.
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 factories.
Power system solutions using.
Ration components.
On the one hand and <unk>.
Trip set capabilities.
That technology gap relative to.
Multiphase has improved as well.
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. So we're going to deliver next year with the with <unk>.
Thank you very much guys.
Thank you.
Okay.
Thank you everyone. Operator, we're I think we're ready to end the call now.
Yeah.
Alright, everyone that concludes your webinar for today. Thank you for joining and have a nice day.
Okay.