Q3 2023 Vicor Corp Earnings Call

Please continue to hold.

[music].

Can I pick on today's webinar entitled would like her earnings results for the third quarter ended September 30.

2020 free my name is general Antonio produce therefore today during the presentation all participants will remain on listen only mode.

Require assistance at any time, please put the messenger checkbooks and send it to the host I would like to advise all parties. This conference is being recorded and now I would like to hand, it over to Joe Smith, Chief Financial Officer. Please go ahead.

Thank you good afternoon, and welcome to <unk> Corporation's earnings call for the third quarter ended September 32023.

Jim Schmidt, Chief Financial Officer, and I'm in and over with Pretreat CEO, Vince Here Rally Chief Executive Officer, and Phil Davies, Corporate Vice President Global sales and marketing.

After the market's close today, we issued a press release summarizing our financial results for the three and nine months ended September 30th.

This press release has been posted on the Investor Relations page of our website Www Dot five 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 its being Capri copyrighted property of VI Cor 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 any statements regarding current and planned products current and potential customers potential market opportunities expected events and announcements and our capacity expansion as well as management's expectations for sales.

Road 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 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 October 24 to 2023.

<unk> 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 of our Q3 financial performance after which Bill will review recent market developments and poultry cheerful and I will take your questions.

In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items and refer you to refer you to our press release or our upcoming Form 10-Q for additional information.

As stated in today's press release Bakeware recur.

Total revenue for the third quarter of $107 $8 million up 1% sequentially from the second quarter of 2023 total of $106 7 million.

And up four 6% from the third quarter of 2022 total of $103 1 million.

Product revenue decreased 13, 5% sequentially to $58 4 million, while brick product revenue increased 26% sequentially to $49 4 million <unk>.

Shipments to stocking distributors increased 55% sequentially and 81, 5% year over year.

Exports for the third quarter decreased sequentially as a percentage of total revenue to approximately 62, 8% from the prior quarters 68, 1%.

For Q3 advanced products share of total revenue decreased to 54, 2% compared to 63, 2% for the second quarter of 2023 with brick brick product share correspondingly increasing to 45, 8% of total revenue.

Turning to Q3 gross margin we recorded a consolidated gross profit margin of 51, 8%, which is a 10 basis point increase from the prior quarter.

I'll now turn to Q3 operating expenses.

Total operating expense increased to seven 7% sequentially from the second quarter of 2000 $23 million to $42 million.

The sequential increase was primarily due to R&D spending.

And an increase in legal fees, which will remain at substantial levels through the completion of the investigation by the International Trade Commission of the unlawful importation into the United States of modules and systems that infringe the asserted vycor patents.

The amounts of total equity based compensation expense for Q3 included in cost of goods SG&A and R&D was 693000 1.788 million in.

And 877000, respectively totaling approximately $3 5 million.

For Q3, we recorded operating income of $15 $7 million.

Representing an operating margin of 14, 6%.

Turning to income taxes, we recorded a tax provision for Q3 of approximately $1 million.

Representing an effective tax rate for the quarter of five 9%.

Net income for Q3 totaled $16 $6 million GAAP diluted earnings per share was <unk> 37.

Based on a fully diluted share count of $45 million 187000 shares.

Fully diluted EPS decreased approximately 3% sequentially compared to 38 in the second quarter of 2023 and.

<unk> increased approximately 825% from four cents per share earned in the same quarter a year ago.

Turning to our cash flow and balance sheet cash and cash equivalents totaled $227 8 million at Q3.

Accounts receivable net of reserves totaled $62 6 million at quarter end with Dsos for trade receivables at 42 days.

Inventories net of reserves decreased one 9% sequentially to $104 6 million.

Annualized inventory turns were two one.

Operating cash flow totaled $23 $8 million for the quarter.

Capital expenditures for Q3 totaled $7 7 million.

We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $26 million.

And with approximately $16 7 million remaining to be spent.

I'll now address bookings and backlog to.

Q3 book to Bill came in below one and one year backlog decreased 19, 6% from the prior quarter closing at $174 7 million.

Turning to the fourth quarter of 2023.

With a reduction in backlog, including overdue backlog, we are more dependent on turns orders and that results in less visibility to our near term outlook.

While that is the case, our current expectation is that revenue gross margin and operating expenses will be approximately flat sequentially.

With that Phil will provide an overview of recent market developments and then Pretreat seal, Phil and I will take your questions.

I ask that you limit yourselves to one question and a related follow up so that we can respond to as many of you as possible in the limited time available.

If you have more than one topic to address please get back in the queue Phil.

Thank you Jim.

So let's begin with an update on our high performance computing or <unk> business, which will continue to be a major growth driver in the next few years.

For the next few quarters, we will be focusing in three key areas.

The first will be ramping production of our Gen 448 volt bus converter and factories power point of load products and our new chip fab.

The second will be completing development of Gen. Five factor is power point of load solutions and delivering models and tools in Q1 of 2024.

The third will be continuing to expand our customer base beyond the major accounts that dominated our revenues in the <unk> market over the past five years.

Regarding revenues in H P. C. We expect customers using both collateral and lateral vertical gen four products to be in production through 2025 before introducing new processes utilizing gen five vertical power delivery or V. PD solutions midway through 2020.

Five.

In reference to the expansion of our customer base. We have continued to have substantial discussions with large data center.

Our next network processor companies on their challenges and powering next generation high current products.

All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale.

The one major technology challenge that is foremost in everyone's minds and heard repeatedly was power density and power delivery.

Power delivery to the processors power delivery to the AI accelerator cards on the rack systems and last but not least power delivery to the data centers, while driving towards a carbon neutral objective.

HBC customers are becoming aware that our gen. Our current gen. Four lateral vertical solutions can reduce power losses, and an AI enabled data center by one to three megawatts.

While enabling high processor performance.

Future processes will however require full vertical power delivery or V. PD to continue power loss reduction.

FICO is first generation V. PD solutions introduced in 2020 required complex stack packaging to incorporate bypass capacitors and our gearbox layer due to insufficient current multiplier density.

Putting that customers at risk competitors are going down the same route with even lower current density based on multi cell multiphase solutions running into greater mechanical and thermal challenges as they try to deploy V PD using thick heavy and thermally inept stacked packages.

<unk>.

Our Gen five MCM technology steps up current density by over three times and reduces the multiplicity of bypass capacitors needed eliminating a stacked capacitive layer on enabling our second generation <unk> solution to the power system requirements of the AI Cod.

That is thinner.

Or thermally adept reliable and cost effective <unk>.

Customer engagements for our Gen five bpd solutions happening at an accelerating pace.

Our objective in coming quarters will be to secure significant design wins.

In view of the current density and performance gaps enabled by our <unk> solutions and evolving AI powered system demands.

Im confident that within a few years, we will gain a dominant share of the AI power system market.

One of the major objectives in the design and development of our <unk> product line was to have a scalable low cost short cycle time, and vertically integrated chip fab with a short timeframe for capacity expansion.

We will need this capability to meet the supply chain demands of our customers who are in two distinct groups at the moment based on different priorities.

The first group, where the priority is supply chain flexibility is focused on a multi source multi phase VR technology.

And the second group, where the priority is competitive advantage from product performance is focused on the power system attributes needed to enable superior AI.

Due to competitive market forces our belief is that the first group will soon embraced the level of innovation that scalability enabled by five <unk> power system solutions from a multiplicity of chip Fabs.

I am very pleased with our progress in other key markets, which are critical to developing a robust and flexible business portfolio overall.

We have reached a very important milestone in our automotive business development, achieving <unk> qualification for three of our platform power modules for 800 volts to 48 volt power conversion.

Which enables production for these products in the second half of 2024.

As in previous quarters, we continue to develop new collaborations with Oems and tier one suppliers.

Who value lightweight high density power system solutions.

These collaborations will enable design wins for 2026 production and beyond.

Towards the end of Q3 and early into Q4, we have seen demand strengthen and a broad industrial aerospace and defense markets for both large Oems and smaller customers, who purchased through our channel partners.

Demand in China remains weak for both legacy brick and advanced products.

And we have been shifting our focus in recent quarters towards the Korean and Asia Pacific markets, where we see new opportunities for our advanced power modules across a broad range of industries.

Our new sales and marketing team in Japan has been making excellent progress developing new pipelines of opportunity with large industrial automation accounts and are on track to add significant revenues in the coming years.

Momentum with our operational excellence initiatives continues with teams working on specific performance improvements with our top 100 customers.

And with new products set to launch in Q4 and Q1 of 2024, we are on track to meet our Ogsm goals.

Customer visits from our top 100 accounts to view, our audit our new chip fab have been averaging one per week in recent months.

This pace will pick up in 2024, as we ramp production and have the ability to host more customers.

Visitors have left impressed with our new fab and its capacity and scalability there.

They understand their need to access our fab capacity for power systems with power density and performance attributes that cannot be supported by multi source multi phased solutions that cannot keep up with our current density on PD and flexibility.

They also understand our commitment to operational excellence is clearly reflected in the equipment process and systems all of our chip fab.

Thank you and with that we will now take your questions.

Okay, operator, we're ready for questions now.

Sure.

If you wish to ask a question just click on our highest hand icon at the bottom of your screen.

If you would likely be <unk>. Your question. Please click on the icon again.

Thank you.

And the first question is coming from John Farmington.

Your line on mute. Please go ahead.

Thank you for taking my question guys.

First one I was just wondering how quality has gone at the new facility.

Can you talk about when Youll start shipping volume through that.

The vertical painting capacity and kind of the initial demand that you're seeing in the response, you're seeing from customers.

I think we had trouble shooting part of your question could you repeat it please.

Sure I was wondering how the qualification process.

So the initial customers for the new vertical vertical vertically integrated planning capacity.

And when do you expect to start shipping volume on the new equipment.

Okay, So as field point.

<unk> 2000 in his prepared remarks that we've had.

Visit at an accelerating pace frequent visits weekly visits.

As he mentioned these fees have generally gone quite well.

Basically the same press.

With.

The equipment the processes to see since we put in place.

To achieve much shorter cycle time.

And scalable capacity.

This is very evident to two every visitor count through the fab.

The fab at this point.

In terms of its severity and take a asher.

What I would say essentially complete.

Not to say that.

All of the equipment is being delivered and installed.

The strategy that you have.

<unk> on Sema is pursued in terms of.

Enabling initial capacity is being too.

Get the car equipment to with respect to actually Mascheroni granted.

<unk> capabilities in place.

While deferring some of the other mass shown in order to facilitate that.

Please continue to hold.

As some of the challenges faced some of the vendors.

MS. Sharon is coming in is getting sold over the next few months.

But while we are in.

In effect not all are you down.

We are down to a very large extent, we can at this point make a complete units, including all of the CE Mashaw package international steps that are essential to fight for.

<unk> products in terms of.

Jono: Welcome everyone, to this webinar entitled, Liker Earning Result for the third quarter in the September 13, 2023.

It vertically integrating processes that have been our source as well as enabling five G.

Jono: My name is Jono, and I am your producer for today. During the presentation, our participants will remain on listen only mode. If we require assistance at any time, please put the message in your chat box and send it to the host.

Platform capability, which has some very exciting new process steps.

Okay to be clear are you already shipping or are you still in the.

Jono: I would like to advise our party as this conference is being recorded, and now I would like to hand it over to Jim Smith, Jeff Financial Officer, please go ahead. Thank you.

Qualifications, and maybe finishing out this facility.

Are you producing out of that that piece that you have been working so hard to in source.

Jim Schmidt: Good afternoon, and welcome to ViCorps Corporation's earnings call for the third quarter ended September 30, 2023. I'm Jim Schmidt, Chief Financial Officer, and I'm in and over with Patrizio Vinciarelli, Chief Executive Officer, and Phil Davies Corporate Vice President Global Sales and Marketing. After the market is closed today, we issued a press release summarizing our financial results for the three and nine months ended September 30. This press release has been posted on the Invest Relations page of our website, www.viCorpsPower.com.

Over the last year or two.

We are using it for from us.

<unk> now has needs I will say most of it now sneeze at this point and begin need to selectively usage for Seth Shostak cash summers, we're seeking short cycle time, a rapid turnaround.

To service their needs, but not on a mass scale yet.

Got it okay.

And just a follow on procedure when do you think the.

Book to Bill will start to creep back over one and you see that your backlog increasingly again.

Jim Schmidt: We also filed a form 8K today related to the issuance of this press release. Our remind listeners, this conference call, is being recorded and is the copyrighted property of ViCorps 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 Security's Litigation Reform Act of 1995, 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, and our capacity expansion, as well as management's expectations for sales growth, spending, and profitability, are forward looking statements involving risk and uncertainties.

Well that could happen relatively soon it could take a little longer we're not going to make any specific prediction.

I think it's accomplished landscape there is a number of variables at play.

So I think we need to be and noncommittal with respect to that.

Okay fair enough I'll jump back in queue. Thank you.

Thank you.

The next question is coming from Sean Dunleavy.

On Youtube.

Please go ahead.

Thanks Bill.

That's a little more color on the bookings for example bookings looks in the next couple of quarters are we going to see sequential increases in the bookings or do you expect them to be flat or down.

Jim Schmidt: In light of these risk 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 risk and uncertainties we face are discussed tonight on 1A of our 2022 form 10K, which we filed with the SEC on February 28, 2023. This document is available via the Edgar system on the SEC's website.

We may see substantial increases.

Again.

We don't want to be very specific because of uncertainties.

That that our salaries of our control.

But there is a range of scenarios that include previous steep climb.

Then again.

It might take a while longer.

Give us a little more color on that.

With what's going on it sounds like.

Jim Schmidt: Please note the information provided during this conference call is accurate only as of today, Tuesday, October 24, 2023. By Quarantra Cate 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.

Good.

When you see a nice increase in bookings.

I understand but I.

I really do right.

Give us a little more color on that that'd be helpful.

So John this is Phil so as Patricia said its a complex landscape of.

Older programs ramping down newer programs coming up.

There's a whole host of things out there complex ways in terms of the deployment of next generation solutions. So so as Patricio said, it's better to just take a little bit of a wait and see approach to that at the moment given the complexities that we're looking at.

Jim Schmidt: I'll now turn to a review of our Q3 financial performance, after which Phil will review recent market developments, and Patrizio Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items, and refer you to our press release, or our upcoming form 10Q for additional information. As stated in today's press release, Vicor recorded total revenue for the third quarter of $107.8 million, up 1% sequentially from the second quarter of 2023 total of 106.7 million, and up 4.6% from the third quarter of 2022 total of $103.1 million.

Yes.

I guess I understand that this is a bunch of people or short on the spot market as Stuart Youre running around saying you guys aren't going to see bookings increase.

The GPU business, maybe you can just answer that question a little bit better because.

They are pretty vocal about.

The demise of the ride for and they are really betting.

Okay.

Im just wondering maybe you can help us out a little bit here give us a little color on where do you see as well.

This concern.

Jim Schmidt: Vance Product Revenue decreased 13.5% sequentially to 58.4 million, while Brook Product Revenue increased 26% sequentially to 49.4 million. Schimitz Distocking Distributors increased 50.5% sequentially, and 81.5% year over year. Exports for the third quarter decrease sequentially, as a percentage of total revenue to approximately 62.8% from the prior quarter's 68.1%. For Q3, Advanced Product Shared of Total Revenue decreased to 54.2%, compared to 63.2% for the second quarter of 2023, with Brook Product Shared correspondingly increasing to 45.8% of total revenue.

John as you know.

Thank you you've been an investor for a long time, we don't run.

Our car finance and based on.

What the charges might do.

Or any <unk>.

Near term.

Type of consideration, we take the long view.

We are very committed.

We believe we are.

Very unique position the ALM position that can support.

Creating a market needs.

So that's how we run the confidence that's how we operate.

We're not going to get into.

Any is debate regarding that which to us is quite obvious with respect to the tenure of our techs.

Jim Schmidt: Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 51.8%, which is a 10 basis point increase from the prior quarter. I'll now turn to Q3 operating expenses. Total operating expense increased 7.7% sequentially from the second quarter of 2023 to $40.2 million. The sequential increase was primarily due to R&D spending, and an increase in legal fees, which will remain at substantial levels through the completion of the investigation by the International Trade Commission of the unlawful importation into the United States of modules and systems that infringe the asserted vicar patterns.

Technology is the need for it.

Is the <unk>.

Eliminating flocking to us in terms of their.

Nextgen Ashram AI needs.

A confirm what we believe.

And is subjectivity supported by.

Numbers, such as current density and <unk>.

<unk> flexibility and vertical power delivery capabilities there.

Are without equal in the industry. So.

Yes.

Jim Schmidt: The amounts of total equity-based compensation expense for Q3 included in cost of goods, SG&A, and R&D, was $693,000, $1,788,000, and $977,000, respectively, totaling approximately $3.5 million. For Q3, we recorded operating income of $15.7 million, representing an operating margin of 14.6%. Turning to income taxes, we recorded a tax provision for Q3 of approximately $1 million, representing an effective tax rate for the quarter of 5.9%. Net income for Q3 total $16.6 million. Gap diluted earnings per share with 37 cents, based on a fully diluted share count of 45 million 187,000 shares.

What I think.

Investors should be relying upon obviously they have a choice to believe us or not believe us we believe ourselves and time will tell with respect to that.

I completely understand.

Bulk programs, where there was.

And I understand that all too well.

I don't know if all the investors to please.

Please I understand.

So if some down.

It's going to be too bad for them, but I think we need to move on to the next topic.

Back in the queue. Thank you very much thank.

Thank you.

Okay.

And the next question is coming from Quinn Bolton.

Jim Schmidt: Fully diluted EPS decreased approximately 3%, sequentially compared to 38 cents in the second quarter of 2023, and increased approximately 825% from 4 cents per share earned in the same quarter a year ago. Turning to our cash flow and balance sheet, cash and cash equivalent total 227.8 million at Q3, accounts receivable net of reserves totaled 62.6 million at quarter end, with DSOs for trade receivables at 42 days. Inventories net of reserves decreased 1.9 percent sequentially to 104.6 million.

Muted please.

Please go ahead.

Guys can you hear me.

Yes, yes.

I guess first question.

Last quarter, you guys seem pretty excited about this new AI platform that you expected to ramp in the fourth quarter of 2003 and throughout 2024 can you just give us any updates on that program, how you're feeling about it is it still on track and starting to see more bookings.

Associated for that.

And a related question there now two platforms on the market one by a video one by A&D that I think both are rated at 1001 <unk> It seems.

Jim Schmidt: Annualized inventory turns were 2.1, operating cash flow total 23.8 million dollars for the quarter. Capital expenditures for Q3 total 7.7 million, winded the quarter with a construction and progress balance primarily for manufacturing equipment of approximately 26 million, and with approximately 16.7 million remaining to be spent.

Seems like a thousand what kind of the.

Our level of where you guys bring real advantages, especially with lateral vertical.

Can you confirm whether this AI platform is indeed 1000 watts.

So.

Quinn this is Phil so far.

Jim Schmidt: I'll now address bookings and backlog. Two, three book to bill came in below one, and one year backlog decreased 19.6 percent from the prior quarter, closing at 1.74.7 million. Turn to the fourth quarter of 2023, with reduction in backlog, including overview backlog, we are more dependent on turns orders and that results in less visibility to our near-term outlook. While that is the case, our current expectation is that revenue, gross margin, and operating expenses will be approximately flat sequentially.

First part of your question I think it was.

What we talked about the last call and my prepared remarks, I basically said that the first area of focus was to ramp in Q4, our 48 volt bus converters and factories power solution. So I hope that answers that question pretty clearly.

The second in terms of.

We're seeing you know 1000 watts.

Gpus and network processors, and all sorts of Asics and <unk>.

<unk> is a CPU GPU combos out there.

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

And as Patricio talked about we have the technology.

To address those that offers as I mentioned in my prepared remarks, as well significant policy savings with lateral vertical solutions.

The scale of megawatts and data centers, which is really critical to any data Center company.

Phil Davies: Phil, thank you, Jim.

Phil Davies: Let's begin with an update on our high performance computing or HPC business, which will continue to be our major growth driver in the next few years. For the next few quarters, we will be focusing in three key areas. The first will be ramping production of our Gen 4 48 volt bus converter and factorize power point of load products in our new chip fab. The second will be completing development of our Gen 5 factorize power point of load solutions and delivering models and tools in Q1 of 2024.

And we with our Gen five technology coming along.

The level of engagement now is very very high as I said, we are having substantial conversations now with customers that will diversify us away from the two big guys that we've been doing business with for the next for the last few years. So so as I said I'm very confident in the future and where we stand and.

It's a bit of a complex landscape as I said, because <unk> got new programs.

Adding up all programs ending there's a bunch of other stuff going on out there with technology and product introduction so.

Phil Davies: The third will be continuing to expand our customer base beyond the major accounts that dominated our revenues in the HPC market over the past five years. Regarding revenues in HPC, we expect customers using both lateral and lateral vertical Gen 4 products to be in production through 2025 before introducing new processes utilizing Gen 5 vertical power delivery or VPD solutions midway through 2025. In reference to the expansion of our customer base, we have continued to have substantial discussions with large data center, AI and network processor companies on their challenges in powering next generation, high current products.

As I say, we're confident in our position in the market.

Thank you Julie.

Question.

And this is kind of highlighted I think some of your legal proceedings that ITC complaint against Delta, but it looks like one of your big motherboard customers has moved it looks like in scale to acute stage.

Architecture and away from factor eight hour and I think Delta has come in in one some of the sockets away from your <unk> I guess.

Can you give us any sense of what's going on in the motherboard business how much of that business do you think those two stage how much of it the single stage because it seems like a big customer has moved away from <unk>.

Phil Davies: All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale. The one major technology challenge that is foremost in everyone's minds and heard repeatedly was power density and power delivery. Power delivery to the processors, power delivery to the AI accelerator cards on their rack systems, and last but not least, power delivery to the data centers while driving towards a carbon neutral objective.

With that transition to stage architecture and Delta has come in.

So <unk> 12, or <unk> 48 to 12 volt module.

So as you may know <unk> pioneered the <unk> bus converter.

We have a substantial IP we've asserted.

Patterns coming at it from.

To defend the actions they are not the only patents we have that covered that technology.

We have licensed fit.

There are Oems.

Oems that Tom.

Phil Davies: HPC customers are becoming aware that our current Gen 4 lateral vertical solutions can reduce power losses in an AI-enabled data center by one to three megawatts while enabling high processor performance. Future processors will, however, require full vertical power delivery or VPD to continue power loss reduction. VICO's first generation VPD solutions introduced in 2020 required complex stack packaging to incorporate bypass capacitors in a gearbox layer due to insufficient current multiplier density. Putting their customers at risk, competitors are going down the same route with even lower current density based on multi-cell, multi-phase solutions running into greater mechanical and thermal challenges as they try to deploy VPD using thick, heavy, and thermally inept stack packages.

We are paying royalties.

For those and BMS and they're the ones that they have certainty or continuity of supply.

The other ones that are being taken chances and those are going to grow lined out.

In the next year, that's what's going to drop.

Yes.

I would say that when our Gen. Five technology is introduced to the market next year.

What have been the CPU requirements have been creeping up 500, 600 amps now for some of these motherboards I think our Gen. Five solutions will cause a number of customers to reevaluate that two stage approach given the performance that they can get from our gen. Five so.

I think you know the market has moved from two to one to two it'll go back to one in my opinion, yes, I second that.

To be clear in answer to your question.

Phil Davies: Our Gen 5 MCM technology steps up current density by over three times and reduces the multiplicity of bypass capacitors needed, eliminating a stack capacitive layer and enabling a second generation VPD solution to the power system requirements of the AI card that is thinner, more thermally adept, reliable, and cost-effective. Customer engagements for our Gen 5 VPD solutions are happening at an accelerating pace, and our objective incoming quarters will be to secure significant design wins.

<unk> is not as much as we love it we invented right but.

You'll hear from me first.

It's not the long term solution.

Two.

Three M square millimeter Theyre high density VP D scalable.

Robust cost effective apd.

Our next shot Ashwin it is not.

At St James SaaS.

Asia.

Is tapped to in effect drive.

A multi source multi phased capability that is fundamentally you handicap in snow really setting out to be when you get after to the kilowatt level or the <unk> level.

Phil Davies: In view of the current density and performance gaps enabled by our 5G solutions and evolving AI power system demands, I am confident that within a few years we will gain a dominant share of the AI power system market. One of the major objectives in the design and development of our 5G product line was to have a scalable low cost short cycle time and vertically integrated chipfab with a short time frame for capacity expansion.

Truly multi sellers.

<unk> brought about significant tradeoffs.

Tradeoffs in terms of the.

Four months, which are not sustainable in our competitive landscape.

Got it okay. Thank.

Thank you. Thank you.

And just be reminded everyone. If you joined using the phone line and if you wish to ask a question. Please press star and the fee.

Phil Davies: We will need this capability to meet the supply chain demands of our customers who are in two distinct groups at the moment based on different priorities. The first group where the priority is supply chain flexibility is focused on a multi-source, multi-phase VR technology and the second group where the priority is competitive advantage from product performance is focused on the power system attributes needed to enable superior AI. Due to competitive market forces, our belief is that the first group will soon embrace the level of innovation and scalability enabled by 5G power system solutions from a multiplicity of chipfab.

And the next question is coming from.

John Dillon.

On muted. Please go ahead.

Yes.

You had a lateral length of lateral.

Major customer.

Morning.

John Interactive, but its hard at least for me to hear what Youre, saying.

It's coming across a little bit muted and mumbled, John if you can do something with you speak of that would be great.

And then just a little bit better.

Yes, yes, yes.

Last call you stated you had a lateral and a lateral vertical opportunity with a major customer.

Phil Davies: I am very pleased with our progress in other key markets, which are critical to developing a robust and flexible business portfolio of our own. We have reached a very important milestone in our automotive business development, achieving peacock qualification for three of our platform power modules for 800 volts to 48 volt power conversion, which enables production for these products in the second half of 2024. As in previous quarters, we continue to develop new collaborations with OEMs and T01 suppliers, who evaluate lightweight, high-density power system solutions.

And I was wondering if presented as same keep you waiting for two separate Gpus.

So what we talked about there was that we have lateral and lateral vertical solutions for not just one customer.

But we are bringing that solution forward and we have customers looking at that both of those solutions.

Certainly the number of customers looking at lateral deployments, a little bit higher than the number with lateral vertical where we have both.

In that sense.

So the way in which we are now <unk> set evolved but make no mistake.

Phil Davies: These collaborations will enable design winds for 2026 production and beyond. Towards the end of Q3 and early into Q4, we have seen demand strengthen in our broad industrial aerospace and defense markets for both large OEMs and smaller customers who purchase through our channel partners. Demand in China remains weak for both legacy brick and advanced products, and we have been shifting our focus in recent quarters towards the Korean and Asia Pacific markets, where we see new opportunities for our advanced power modules across a broad range of industries.

The future and the future is coming next year.

Is no longer with lab at all Pbms in fact, all of the design activity that we're engaged in at this point.

<unk> is.

Beyond the latter up here yet.

On our call with an important potential customer tomorrow, we're not even going to consider our entertain a lot of RPM.

There are a lot of Vertigo are what we call secondary ashram Apd.

She is a more advance more scalable more robust form of PPD that falls on the yields of the first transaction that <unk> pioneered and Oscar host Companys.

Phil Davies: Our new sales and marketing team in Japan has been making excellent progress, developing new pipelines of opportunity with large industrial automation accounts, and are on track to add significant revenues in the coming years. Momentum with our operational and excellence initiatives continues with teams working on specific performance improvements with our top 100 customers, and with new products set to launch in Q4 and Q1 of 2024, we are on track to meet our OGSM goals.

Tried to copy.

So.

With the one major customer now.

They have two different designs with you one for you.

Are they working.

With tier one customers.

<unk>.

Using one using lateral it's going to be using lateral vertical or is it the same GPU. That's initially again lateral.

Phil Davies: Customer visits from our top 100 accounts to view or audit our new chipfab have been averaging one per week in recent months. This pace will pick up in 2024 as we ramp production and have the ability to host more customers. Visitors have left impressed with our new FAB and its capacity and scalability. They understand their need to access our FAB capacity for power systems with power density and performance attributes that cannot be supported by multi-source, multi-phase solutions that cannot keep up with our current density and PDN flexibility. They also understand our commitment to operational excellence that's clearly reflected in the equipment, process, and systems of our chipfab.

The lateral and vertical.

Hey, John we're not going to talk about any one cast or I'm sorry, but.

Bear with us.

That's that's small that level of specificity that we want to get involved with.

Okay, and then one last question.

When do you expect Gms gross margins.

The new factory.

Well I think.

We are.

On a general upward trend.

<unk>.

Desktop to say that we're going to see if positive improvements each and every quarter.

But.

We have been in the low 50%.

Operator: Thank you, and with that, we will now take your questions. Okay, operator, we're ready for questions now. Sure, everyone, if you wish to ask a question please click on Rise and Icon at the bottom of your screen. If you would like to be to know your question, please click on the hand icon again. Thank you.

Range.

And.

I think the three of us feel Jim.

Myself.

Line of sight.

Two a considerably higher numbers.

Buffy do too.

The unique fab it capabilities that we've put in place.

A considerable.

<unk>.

John Langton: And the first question is coming from John Langton. You are on mute, please go ahead. Thank you for taking my question, guys. First one is just wondering how qualifications have been at the new facility. Can you talk about when you'll start shipping volume through the vertical planning capacity and kind of the initial demand that you're seeing and the response that you're seeing from customers? I think we had trouble hearing part of your question.

But also.

Significantly in terms of.

The five point of load technology that takes us too much.

Stronger position in terms of.

Not just performance, but cost effectiveness and some of that is going to be.

Along to customers in the form of more cost effective solutions, but at the same time those more cost effective solution sell at lower price points in terms of SaaS path to cast him that will result in substantially higher margins for vital.

John Langton: Could you repeat it, please? Sure. I was wondering how the qualification process went for the initial customers for the new vertical vertical vertically integrated planning capacity and when you expect to start shipping volume on that new equipment. Okay. So, as Phil pointed out in his preparing marks, we've had visits at an exciting pace, frequent visits, weekly visits. As he mentioned, these visits have generally gone quite well. Visitors are impressed with the equipment processes, the systems we put in place to achieve much shorter cycle time and scalable capacity.

Alright, Thank you very much.

The next question is coming from the attendee, who joined over the phone.

So please introduce yourself before you would take your question.

Good now.

Hi, Richard Shannon with Craig Hallum can you guys hear me.

Yes.

Alright excellent.

Let's see a couple of questions maybe follow upping on the topic of bookings here I think last quarter, you felt fairly confident that that.

Backlogs would improve either in the ending third quarter fourth quarter now you seem to your less certain of that.

And I think if I understood one of the answers to a prior question are you still expecting the design with a major customer too.

John Langton: This is very evident to every visitor that has come through the fa. The fa at this point in terms of its vertical integration is what I would say essentially complete. But that's not to say that all the equipment has been delivered and installed. The strategy that the veterans team has pursued in terms of enabling initial capacity has been to get the core equipment with respect to the measure integrated packaging capabilities in place while deferring some of the other measure in order to facilitate some of the challenges by some of the vendors.

That is still active here. So it seems like a couple of simple explanation for that would be either that design is delayed or your share of the size of the opportunity is.

We're limited in what you initially had thought or potentially there's other reasons. So can you help us understand those dynamics relative to your last conference call.

I think I've made clear that we really don't want to.

Go into that level of detail.

To be clear.

Well I appreciate the.

<unk> for the interest for curiosity.

It's really got very little to do with Vegas opportunity.

In the medium and long term and that's what we're really focused on.

John Langton: That dimension is coming in and is getting sold over the next few months. But while we are in effect not all of them, we are done to a very large extent. We can at this point make complete units, including all of the dimensional package integration steps that are essential for G products in terms of very integrating processes that have been outsourced as well as enabling 5G platform capability which has very exciting new process steps.

Okay.

I guess I'll jump to another question here, maybe looking a little bit longer term and Phil I'm going back to your prepared remarks here about.

Time frame for five year technology to be ramping I think you said in 25, if I caught my ear.

If I caught your commentary correctly is this the expectation of one that would intersect with the first ramp up and three nanometer.

You can see in the market is there some dynamic youre expecting intersect with.

No I think that with five G is I believe looking at the what it's capable of doing to the market is going to be very ubiquitous I think we'll see design ins as we've talked about even down in the low hundreds of apps because of the density and cost effectiveness and performance level over the technology.

John Langton: Okay, to be clear, are you already shipping or are you still in the qualifications and maybe finishing outstages of the facility or are you producing out of that piece that you've been working so hard to insource over the last year or two? We are using it for some of our in-house needs. I would say most of our in-house needs at this point and beginning to selectively use it for certain customers who were seeking short cycle time or have been turned around to service their needs, but not on an outskill yet.

So it's going to be ubiquitous across all sorts of different the high performance computing markets, but with regards to what we see from a deployment perspective 24 will be obviously, a big design win year for us with <unk>.

Increasing number of customers and then a ramp to production in the 25.

Timeframe some customers early in 'twenty five other customers sort of midway through the year.

So there'll be a mix and a blend of.

Of both domestic and international customers actually so.

John Langton: Got it, okay, just to follow on the trigger, when do you think the book to bill will start to creep back over one, and you see the backlight increasing again? Well, that could happen relatively soon. It could take a little longer. We're not going to make any specific prediction. I think it's accomplished landscape and there's a number of variable supply. So, I think we need to be no committer with respect to that. Okay, sorry enough. I'll jump back and keep you. Thank you.

So again, that's going to set the scene for us to take really significant share in the ever expanding AI market.

That's what we're looking at right now Richard.

Okay. Thank you I'll jump back in the queue.

Thank you.

Yes.

The next question is coming from Quinn Bolton.

Please go ahead.

Yes.

Just a follow up there.

Richards question.

If 2024.

Or is sort of a transition year design year for Gen. Five in 2020.

John Dillon: The next question is coming from John Dillon. You are unmuted. Please go ahead. Hey Phil, I'm wondering if you can give us a little more color on the bookings. For example, how do the bookings look for the next couple of quarters? Are we going to see sequential increases in the bookings, or are you expecting to be flatter down? We may see substantial increases. Again, we don't want to be very specific because of uncertainties that are some of the control, but there is a range of scenarios that include pretty steep climb, but then again, it might take a while longer.

The real ramp of the Gen five technology.

John Dillon: Just give us a little more color on that. What's going on? It sounds like you could possibly see a nice increase in bookings, but and I understand bookings trust me, I really do, but if you just give us a little more color on that, it'd be helpful. So John, as Patrice has said, it's a complex landscape of older programs ramping down, newer programs coming up. There's a whole host of things out there complex-wise in terms of the deployment of next-generation solutions.

Would you expect.

Quarterly revenue Steve.

At about <unk>.

<unk> levels until you get to that Gen five ramp or.

Do you see any opportunity that has some of the gen four lateral and lateral vertical solutions coming to market that you could actually see growth in quarterly revenue now I'm not trying to get you to give us a quarter when it may grow and just how do you think about revenue over the next four to five quarters do we need Gen five.

To wrap up before we see a significant increase in quarterly revenue or in that sooner with gen. Four lateral lateral hurdle.

So so quinn as we so it's a complex landscape right now.

We've got confidence in our Gen five gen four lateral and lateral vertical solutions.

We're going to see how that goes but.

I believe that that technology again, as we've talked about you can't not save megawatts for your end customer are not considered seriously for deployment great. I'd just go back to that so it's a very important step for us towards Gen. Five.

But we've got great products that we're going to be ramping this quarter and into next quarter. So.

John Dillon: So, as Patrice has said, it's better to just take a little bit of a wait and see approach to that at the moment given either set the complexities that we're looking at. I guess I understand that the problem is there's a bunch of people who are short on the stock, and the shorts are running around saying, you know, you guys aren't going to see any bookings increase, then you're out of the GPU business.

We have a bridge if you would like to the Gen five.

Got it thank you Phil.

Yes.

The next question is coming from John Coleman thing.

Please go ahead.

John Dillon: Maybe you can just answer that question a little bit better because they're pretty vocal about the demise of life, and they're really betting against you and the company. So, I'm just wondering if you can help us settle over here. Give us a little color on, you know, what do you see as far as G&P delay in this concern? John, as you know, I think you've been an investor for one time. We don't run a company based on what the shorts might do, or any near-term type of consideration.

On mute.

Hi, Thank you I was wondering Jim if you could break out the actual <unk>.

Legal expense in the quarter and kind of what you expect the run rate to be.

ITC.

Instigation.

For the next couple of quarters.

Incrementally John I won't.

Quote an exact number but it's in the millions of dollars and it's very substantial.

For us as you know a smaller company.

But we believe it's well worth taking on because of the strength of our position.

Yeah.

Got it do you expect it to increase from what you did in.

John Dillon: We take the long view. We are very committed. We believe we are in a very unique position, the only position that can support critical economies. So, that's how we run the company, that's how we operate. We're not going to get into any debate regarding that which to us is quite obvious, which is right to the tenure of our technology, the need for it. The customers that are literally flocking to us in terms of their natural action AI needs.

In the quarter here.

John Dillon: A confirm what we believe and is subjectively supported by numbers such as current density and BDN flexibility and vertical power delivery capabilities that are without equal in the industry. So that's what I think investors should be reliant on. Obviously there is a choice to believe us or not believe us. We believe ourselves and time will tell with respect to that. I completely understand I was involved in programs where there was voltage drop and I understand that all too well. I don't know if all the investors do, but I completely understand what you're talking about.

Yes.

We're prepared to invest as much as necessary again in one way of looking at it.

<unk>.

This the intellectual property side of our business is profitable.

The operating expense.

Relating to assert intellectual property is more than cover.

By intellectual property.

<unk> income and we expect that to continue to move in the right direction.

Particularly as it becomes evident to.

Two Oems, we have been taking a wait and see attitude with respect to ow.

This mail play out that they're going to be left in the large buy comp base that solar and our technology.

Got it perfect.

So I was wondering if you could expand just a little bit on the enthusiasm.

We're seeing out there for the Gen five ETD.

What's like the breadth of the customer that youre seeing today versus where you were.

Maybe in the same time in the design cycle for the.

The current Gen of the hypothesis would you say.

A lot more volume and opportunity out there.

Today, just because of all the all the I guess the amount of competitors that are out there number one number two the size of the opportunity increasing.

Just help me size, what that opportunity looks like Gen four versus Gen size, if you can.

Yes.

Current density improvement first of all you've got the drivers of the much higher currents coming along for all of the processes across networking AI CPU right. That's the first thing secondly, the market's expanding at an incredible rate, particularly on the AI side, but as you add more AI you also need to add more.

John Dillon: So if some down, that's going to be too bad for them, but I think we need to move on to the next topic. I think it's here. Thank you very much. Thank you.

You also need to add more networking, so everything sort of getting the big uplift.

Quinn Bolton: And the next question is coming from Quinn Bolton. You are unmuted. Please go ahead. Hey guys, can you hear me? Yes, I guess first question. Last question, you guys seem pretty excited about this new AI platform that you expected to ramp in the 424 or 23 and throughout 2024. Can you just give us any updates on that program? How you feeling about it? Is it still on track? You started to see more bookings associated for that?

Then you factor in that our Gen. Five this got three times the current density over the Gen four technology.

And the reaction to that then we've shown.

But a lot of the customers actually then you go down the list of the majors in data Center AI processors network processors.

We've shown them examples of the mechanical examples of the packaging that we're going to have I mean, the reaction is astounding.

They are astonished that we can put as much current as we can into that small of a package and theyre. If theyre looking at the PD today, because that's where they're going to go as Patricia said all of the conversations now are about V PD that Scott about lateral.

Quinn Bolton: And a related question. There are now two platforms on the market, one by a video, one by AMD, that I think both are rated at 1000 watt TDP. It seems like 1000 watt is kind of the key power level where you guys bring some real advantages, especially with lateral vertical. Can you confirm whether this AI platform is indeed 1000 watt to you?

Their current gen fours lateral vertical but gen. Five is all about vertical.

They look at that and they say Oh, my God I don't need to distribute my capacitive layer underneath my board I can put one of these tiny little current multipliers there I don't have to worry about Mechanicals thermals.

Everything sort of fits and so the reaction is incredible when compared to companies.

Phil Davies: So the first part of your question I think was what we talked about the last call. And my prepaid remarks, I basically said that the first area of focus was to ramp in Q4, our 48 volt bus converters and factorized power solutions. I hope that answers that question pretty clearly. The second in terms of power, we're seeing 1000 watt GPUs and network processes and all sorts of ASICs and mixes of CPU, GPU combos out there.

Similar to Chinese companies that are trying to copy our MBS trying to do this thing with PPD.

Copying the basically the wrong thing, which is a stack package really heavy.

Really terrible.

They are leading customers down the wrong path and the customers can see that when they see our gen. Five technology. So the excitement is really incredible and I'm very confident as I said, we're going to take major share here in this market.

Gotcha.

It is.

Phil Davies: As Patrizio talked about, we have the technology to address those that offers as I mentioned in my prepaid remarks as well. Significant power savings with lateral vertical solutions of the scale of megawatts in data centers, which is really critical to any data center company. And with our Gen 5 technology coming along, I mean, the level of engagement now is very, very high. As I said, we're having substantial conversations now with customers that will diversify us away from the two big guys that we've been doing business with for the next.

As in all of our shows from a.

Refresh ability perspective.

From an IP perspective as well.

So.

There too.

<unk>.

Foreign suppliers.

Closing not just themselves, but major Oems of substantial risk with respect to continuous supply it both in terms of the viability of this solution.

From a bus perspective and from the perspective of viability from an IP perspective, or non infringement perspective, I should say.

Phil Davies: For the last few years. So as I said, I'm very confident in the future and where we stand. And it's a bit of a complex landscape, as I said, because you've got new programs starting up, old programs ending, there's a bunch of other stuff going on out there with technology and product introduction. So as I said, we're confident in our position in the market.

Phil Davies: Thank you. Thank you so much.

Got it so fair to say that the pull is much stronger on gen side than it was in the Gen. Four Gen five.

Sure.

Yes, I think that the customer.

Customers are going to get both performance right.

And power savings and that can be talked about all of the advantages of reliability of cost.

That add onto all of that and with our scalable chip fab, we're going to be able to work with customers on flexible supply chain solutions. So we are sitting in a very good place John.

Quinn Bolton: Question, and this is kind of highlighted in I think some of your legal proceedings that I can see complaints against Delta, but it looks like one of your big motherboard customers has moved. It looks like in scale to a two stage, you know, architecture and away from factorized hour. And I think Delta has come in and. And one, some of the sockets away from your MBM, I guess. Can you give us any sense of what's going on in the motherboard business?

Great. Thank you.

Quinn Bolton: How much of that business do you think goes to stage? How much of it stays single stage? Because it seems like, you know, a big customer has, has moved away from by core. Or, you know, with that transition to two stage architecture and, you know, Delta's come in to do the 12th or 48 to 12 more modules. So as you may know, I go pioneered the MBM bus converter. We have substantial IP.

Next question is coming from.

Attendees, who joined over the phone. So please introduce yourself before you have your question right.

You can now.

Hi, Richard Shannon from Craig Hallum again, guys can you hear me.

Yes.

Okay, great. Thank you.

Phil I wanted to ask you about one of your statements in your prepared remarks here about <unk> technology.

Kind of targeting two different groups have different priorities here.

The last part of that statement unless you believe the first group will embrace level of innovation from <unk> from a multiplicity of chip Fabs.

Since you only have one at least that you've talked about are in plan.

The parts of the state and a little bit more Intel us what you mean by that and over what timeframe, we could see a multiplicity of chip fab space.

Well I'll try to answer that question.

Quinn Bolton: We've asserted three different patterns coming at it from three different directions. And they're not the only palace we have that covered that technology. We have licensed it. There are OEMs that are paying royalties for those MBMs. And they're the ones that they have certainty or continuity of supply. There are other ones that being taken chances. And those are going to go online now in the next year. That's what's going to happen.

Even.

Yeah.

And lack of <unk>.

<unk> visibility with respect to debt so bear with me.

To answer your question in General terms.

As you know it took many years and.

Very substantial investment.

To bring.

Together.

Chip fab.

<unk>.

In some respects.

This initiative.

<unk> seen.

Quinn Bolton: And Quinn, I would say that when our Gen 5 technology is introduced to the market next year, what have been, you know, the CPU requirements have been creeping up, you know, 500, 600 amps now for some of these motherboards. I think our Gen 5 solutions will cause a number of customers to revaluate that two stage approach given the performance that they can get from our Gen 5. So I think, you know, the market has moved from two to a one to two and it'll go back to one in my opinion.

Similar to the.

The kinds of Fabs.

Most of our so familiar with semiconductor fabs.

And as in that case.

The technical complexity.

Complexity from the perspective of it.

Equipment and processes.

Is such that bringing it to closure.

A first fab.

Thanks, again considerable time proceeds.

Quinn Bolton: Yeah, I second that. So to be clear in answer to your question, the NBM is not, you know, as much as we love it, we invested, right? But you live from your first. It's not a long-term solution to 3M, just quite a millimeter, high density, VPD, scalable, robust, cost-effective VPD for natural action. It is not. It seems to me that it's essential. It's an attempt to, in effect, drive a multi source multi-phase capability that is fundamentally anti-cap.

And investments.

But the great.

News with respect to having done it.

Is that replicating it.

Is.

Our sampling it can be done on a much shorter cycle time.

With a high degree of predictability.

The investments involved.

Substantial it is in the hundreds of millions.

All on indirect perspective from <unk> perspective.

Oems wishing too.

Have flexibility from a sourcing perspective.

Given their.

So you think of all of these and volume obligations.

Quinn Bolton: It's not really setting out to be when you get up to the kilowatt level or the thousand amp per level, truly multi source. It has brought about significant trade-offs in terms of performance, which are not sustainable in a competitive landscape. . [inaudible] . .

In that perspective.

Even a small investment so we do anticipate.

Martin one fab.

Coming to.

Is the market too.

Bring about an ecosystem.

Large Oems.

That cannot for good reason rely on capacity from just the first cycle.

Well avail themselves of capacity from power facilities.

Okay, I guess, we'll parse that statement and ask them out in the future, particularly thanks for that and I'm going to follow up.

I'm one of your answers to a prior question here talking about.

I think probably not get your tumor wording correct. Your petroleum gauge lets the customers that are interested in vertical only solutions, either first or second gen. Here.

Is that does that essentially saying or are you, saying that youre not seeing anyone with a sufficient level of power and I'll use 1000 amps as maybe that demarcation line tell me if it's different.

That are not looking are you telling me that they're not looking at lateral at all or you're just talking with our guys are only looking at vertical.

Okay.

So.

<unk> has been looking at.

Programs on different tasks and in some cases a few months.

Sure.

The better part of the year.

With different economy farmers and stuff.

Our focus is to.

To engage.

Well, we can contribute substantial value.

Through a fatigue hygiene solutions.

With <unk> unique set of attributes.

And those.

Hey, guys differentiate it when you get past a lot of it off but it can be a lot of work to go with demonstrated that.

A lot of RTL rohit to allow it all.

Higher levels of roughly 1000 apps.

To achieve.

Something of the order of nearly 150 watts of Av.

TVN will act.

And Indeed act at power savings those are very substantial and goes.

When.

Apply the cost give us that this is out.

<unk> in the Mega Watt.

Scale savings event, Phil referenced earlier. So these are valuable position, there and that can be done with our <unk> technology, even though the vast feel that technology is.

No.

A small fraction of our current density with Taiji. So.

So it is a that a lot of RTL volume overseas shop, there and we can engage there too to enable customers to achieve their objectives, but the much bigger opportunity is looking a little beyond.

The next few months or six nine months of <unk>.

<unk> going to go into production as field set.

Flat next year.

Early 'twenty five.

With <unk> <unk>, five millimeter theyre, all new world or capabilities that Tom.

Patrizio Vinciarelli: Well, I think we are on a general upper-friend. That's not to say that we're going to see the positive improvement each and every quarter. But we have been in the low 50% range. And I think the few of us here feel Jim and myself have line of side to a considerably higher numbers. I feed you to the unique fab capabilities that we put in place, a considerable investment. But also significantly in terms of the 5G point of law technology that takes us to a much stronger position in terms of not just performance but cost effectiveness.

<unk> is very novel and in turn enable solutions that are out and got all of that activity was right. There. They are scalable they are robust from a mechanical perspective, but from a management perspective, and they are more cost effective.

So Richard this is Phil just to add onto that.

Couple of weeks ago I got it.

To a big data center companies strategic supplier day, where they had their executives presenting on the future roadmaps and the challenges.

Building AI out in their existing data centers as well as adding more data centers going forward as you can imagine as Patricio mentioned here, we're talking about data centers of the 20 megawatt plus level in getting power into those while also trying to get carbon neutral is a massive challenge. So if you look at the amount of compute that's going to be.

Added to support AI going forward.

Both on the CPU side and on the GPU or ASIC side, plus the network processing, even if you save 10 watts, while five watts per the CPU.

Patrizio Vinciarelli: And some of that is going to be path along to customers in the form of more cost effective solutions. But at the same time those more cost effective solutions are the lower price point in terms of sense plan to a customer will result in substantial EI margins for vital. Right, thank you very much.

That's a massive savings when you multiply the amount of compute in a data center. It gets over megawatts very quickly so even to save 10 watts of 15.

400, amp or 300 Amp CPU motherboard and you can do it vertically why not do it vertically. If you can offer that to your customer base. So that's the change that's going on in the market.

To add to that a Saudi goes yes, it too.

Unknown Attendee: The left question is coming from the attendee who joined over the phone.

Two fields.

Richard Shannon: So please introduce yourself before you take your question. You are on your good now. Hi Richard Shannon with Craig Helen, can you guys hear me? Yes. All right, excellent. Let's hear a couple of questions. Maybe following on the topic of bookings here. I think last quarter you felt fairly confident that the backlogs would improve either in the ending third quarter, fourth quarter. Now you're less certain of that. And I think if I understood one of the answers to a prior question, you're still expecting the design with the major customer to that is still active here.

<unk> why not do it that way is that you couldnt do it that way and unique technology that is GAAP.

The high cause absolute the high bandwidth that enables.

A significant fraction of the cap say story. They can have the sockets will be swept away.

So power savings is going to be it is this stuff gets deployed because you cant tolerate youre competing also with all of the Evs out there. The same grid supports all of that plus the data centers. So they are also trying to use renewables, but really significantly reducing the impact on a megawatt scale is massive value add.

Richard Shannon: So seems like a couple simple explanations for that would be either that design is delayed or your share of the size of the opportunity is more limited than what you initially had thought or potential there's other reasons. So can you help us understand those dynamics relative to your last conference call? I think I made clear that we really don't want to go into that level of detail and to be clear. While I appreciate the reason for the interest of the curiosity, it's really got very little to do with vigors opportunity in the medium and long term. And that's what we're really focused on.

Or any of these data center Hyperscale us it's really important.

Okay, operator, I think we're going to have to take maybe one maybe one more question. Please and then we're up to wrap it up.

Alright, so to ask question is coming from John <unk>. Please go ahead.

How are you today.

John.

I Didnt know my hand right.

It wasn't me.

Okay.

In this case, we have no more questions.

Okay. Thank you. Thank you everyone for joining the call.

Thank you Ron.

Okay.

Yeah.

Richard Shannon: Okay, I guess I'll jump to another question here. Maybe looking a little bit longer term and Phil, I'm going back here prepared remarks here about time for five-year technology to be ramping. I think you said in 25 if I caught your commentary correctly. Is this the expectation of one that would intersect with the first ramp of the three nanometer accelerators you see in the market? There's some dynamic you're expecting to intersect with.

Thank you.

Thanks, everyone with Monsanto.

Thank you for joining and have a nice day.

Richard Shannon: No, I think that 5G is, I believe, looking at what it's capable of doing to the market is going to be very ubiquitous. I think we'll see design ins as we've talked about, even down in the, you know, the low hundreds of amps because of the density and cost effectiveness on performance level of the technology. So it's going to be ubiquitous across all sorts of different high performance computing markets. But with regards to what we see from a deployment perspective, 24 will be obviously a big design win year for us with increasing number of customers and then a ramp to production in the 25 timeframe.

Okay.

Richard Shannon: Some customers early in 25 other customers that are midway through the year. So it'll be a mix on a blend of both, you know, domestic and international customers actually. So, again, that's that's going to set the scene for us to take. Really significant share in the ever expanding AI market. That's what we're looking at right now, Richard. Okay. Thank you.

Richard Shannon: I'll jump in again back in the queue. Thank you.

Quinn Bolton: The next question is coming from Queen Bolton. You are muted. Please go ahead. There we go. I guess just a follow up there, Philip, she's a Richard's question. You know, if, if 2024 is sort of a transition year, design year for Gen 5 and 2025, is the real ramp of the Gen 5 technology. Would you expect, you know, quarterly revenue to sort of stay flatish at about current levels until you get to that Gen 5 ramp or DC the opportunity that is some of the Gen 4 lateral and lateral vertical solutions come to market that you could actually see growth and quarterly revenue now.

Quinn Bolton: I'm not trying to get you to give us a quarter when it may grow. I'm just how do you think about revenue over the next four or five quarters? You know, do we need Gen 5 to ramp before we see a significant increase in quarterly revenue or in that sooner with Gen 4 lateral and lateral vertical. Thanks. So, Queen, as we said, it's a complex landscape right now. And, you know, we've got confidence in our Gen 4 lateral and lateral vertical solutions.

Quinn Bolton: We're going to see how that goes, but I believe that that technology, again, as we talked about, you can't not save megawatts for your end customer and not consider it seriously for deployment, right? I just go back to that. So, it's a very important step for us towards Gen 5, but we've got great products that we're going to be ramping this quarter and into next quarter. So, we have a bridge, if you like, to the Gen 5. Got it.

Phil Davies: Thank you, Bill.

John Downwind: The next question is coming from John Downwind thing. Please go ahead.

Jim Schmidt: You are muted. Hi, thank you. I was wondering, Jim, as you could break out the actual legal expense in the quarter and kind of what would you expect the run rate to be as the IPC doesn't investigation over the next couple of quarters? Incidentally, John, I won't put an exact number, but it's in the millions of dollars. And it's very substantial for us as a, you know, a smaller company. But we believe it's what we're taking on because of the strength of our position.

Jim Schmidt: Got it. Did you expect the increase from where you, what you did in the quarter here? No, we're prepared to invest as much as necessary. Again, in one way or looking at this, the intellectual property side of our business is profitable. Right, the operating expense relating to a certain intellectual property is more than cover by intellectual property related income. And we expect that to continue to move in the right direction, particularly as it becomes evident to Williams who have been taking away the Seattle respect to how this may all play out, that they're going to be left in the large by, you know, companies that have stolen after college.

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Phil Davies: Got it. Okay. Phil, I was wondering if you could expand just a little bit on the enthusiasm. You're seeing out there for the, for the Gen 5 EPP. What's like the breadth of the customers that you're seeing today versus where you were? You know, maybe in the same time in the development cycle for the current Gen of AI processes. Would you say that there's a lot more volume and opportunity out there today just because of all the, I guess the amount of competitors are out there, number one, number two, the size, the opportunity increasing.

Phil Davies: Just help me find, you know, what that opportunity looks like, Gen 4 versus Gen 5, if you can. Yeah, I mean the current density improvement. Well, first of all, you've got the drivers of the much higher currents coming along for all of the processes across networking, AI, CPU, right? That's the first thing. Secondly, the market's expanding at an incredible rate, particularly on the AI site. But as you add more AI, you also need to add more CPU, you also need to add more networking.

Phil Davies: So everything's sort of getting the big uplift. Now, then you factor in that our Gen 5 has got three times the current density over the Gen 4 technology. And the reaction to that, and we've shown the lot of the customers actually, and you go down the list of the majors in data center, AI, processes, or network processes. We've shown them examples of the mechanical examples of the packaging that we're going to have.

Phil Davies: I mean, the reaction is astounding. They think they're astonished that we can put as much current as we can into that small of a package. And they're, if they're looking at VPD today, because that's where they're going to go. As Patricio said, all of the conversations now are about VPD. It's not about lateral. The current Gen 4 is lateral vertical, but Gen 5 is all about vertical. They look at that and they say, my God, I don't need to disturb my capacity of layer underneath my board.

Phil Davies: I can put one of these tiny little current multipliers there. I don't have to worry about mechanical thermals, you know, everything sort of fits. And so the reaction is incredible when compared to companies, similar Chinese companies that are trying to copy our NBMs, trying to do this thing with VPD, copying basically the wrong thing, which is a stacked package, really heavy, terribly terrible. You know, they're leading customers down the wrong path, and the customers can see that when they see our Gen 5 technology.

Patrizio Vinciarelli: So the excitement is really incredible, and I'm very confident, as I said, we're going to take major share here in this market. Judge John V.P.E, is an oral show from a multifacial body perspective and from an A.P, perspective as well. So, there, too, Oscar Borrow's foreign suppliers are proving not just themselves, but major reams of substantial risk with respect to continue to supply. It both in terms of, you know, the availability of this solution, from a robust perspective, and from the perspective of availability, from an A.P, perspective or nor infringement perspective, I should say.

Phil Davies: Got it. So, fair to say that the poll is much stronger on Gen 5 than it was in the Gen 4.5. Did you have out there? Yes, I think that the customers are going to get both performance, right? And power savings, and I can be talked about all the advantages of reliability, of cost that add on to all of that. And with our scalable chipfab, we're going to be able to work with customers on flexible supply chain solutions.

Phil Davies: So, we're sitting in a very good place, John. Thank you.

Unknown Attendee: Next question is coming from the attendee who joined over the phone.

Richard Shannon: So, please introduce yourself before you have your question. You're muted now. Hi, Richard Shannon from Craig Allen. Again, guys, can you hear me still? Yes. Okay. Great. Thank you. Phil, I wanted to ask about one of your statements that you prepared or marks here about 5G technology and kind of targeting two different groups of different priorities here. The last part of that statement was you believe the first group will embrace level of innovation for 5G from a multiplicity of chipfabs.

Patrizio Vinciarelli: Since you only have one that least that you've talked about or in plan, can you parse the statement a little bit more and tell us what you mean by that and over what time frame we could see a multiplicity of chipfabs, please? Well, I'll try to answer that question. Again, even the lack of sharp visibility with respect to that. So, bear with me as I answer your question in general terms. As you know, it took many years and a very substantial investment to bring together a first chipfab.

Patrizio Vinciarelli: In some respects, this initiative is similar to the kinds of fabs, most of us are familiar with semiconductor fabs. And as in that case, the technical complexity, the complexity from the perspective of equipment and processes is such that bringing to closure a first fab takes, again, considerable time, our persistence, any investment. But the great and news with respect to having done it is that replicating it is something that can be done on a much shorter cycle time with a high degree of predictability, and the investment involved while substantial.

Patrizio Vinciarelli: It's in the hundreds of millions on indirect perspective, from the perspective of OEMs wishing to have, you know, flexibility from a saucy perspective, given their system capabilities and valuable positions, is in depth perspective a lot of it is more investment. So we do anticipate more than one fan coming to the market to bring about the ecosystem where large OEMs that cannot, for good reason, rely on capacity from just the first bike or fact will avail themselves of capacity from power facilities.

Patrizio Vinciarelli: Okay, I guess we'll parse that statement and ask about the future particular things for that. I'm going to follow up on one of your answers to a prior question here talking about, I think, and I'll probably not get your word incorrect here, but you're only engaged with customers that are interested in vertical only solutions either first or second gen here. Is that essentially saying, are you saying that you're not seeing anyone with a sufficient level of power and I'll use a thousand answers maybe that demarcation line tell me if it's different, that are not looking, are you telling me that they're not looking at lateral at all or you're just talking with the guys that are only looking at vertical?

Patrizio Vinciarelli: So they are typically looking at programs on different timescales in some cases a few months or the better part of the year or a year out with different current requirements. And our focus is to engage where we can contribute substantial value through in particular 5G solutions with their unique set of attributes. And those are particularly differentiated when you get past lateral, right, it can be lateral vertical. We demonstrated that with lateral vertical relative to lateral at current levels of roughly a thousand apps, you can achieve something at the order of nearly 150 watts of PDN, but direct and indirect power savings, those are very substantial.

Patrizio Vinciarelli: And those when applied across data centers result or can result in the mega watt scale settings that feel reference earlier. So there's a valuable position there and that can be done with our 4G technology even though the kind of density of that technology is, you know, a small fraction of current density with 5G. So it is a lot of vertical, there's a valuable position there and we can engage there to enable customers to achieve their objectives.

Phil Davies: But the much bigger opportunity is looking low beyond the next few months or six, nine months. Our systems are going to go into reduction as we feel set. Let Next Year, or early in 25, were with 5GNCNs, a chance for a millimeter, there are all new world capabilities that are enabled, and in turn, enable solutions that are around all that activities, right? They are scalable, they are robust, from a mechanical perspective, they are robust, from a thermal management perspective, and they are more of effective.

Phil Davies: So Richard, this is Phil, just to add on to that. A couple of weeks ago, I got invited to a big data center, company's strategic supplier day, where they had their executives presenting on the future road maps and the challenges of building AI out in their existing data centers, as well as adding more data centers going forward. And as you can imagine, as Patrizio mentioned here, we're talking about data centers of the 20 MW plus level, and getting power into those while also trying to get carbon neutral as a massive challenge.

Phil Davies: So if you look at the amount of compute that's going to be needed to support AI going forward, both on the CPU site and on the GPU or ASIC site, plus the network processing. Even if you save 10 watts or 5 watts per the CPU, that's a massive savings, when you multiply the amount of compute in a data center, it gets over megawatts very quickly. So even to save 10 watts or 15 watts in a 400 amp or 300 amp CPU motherboard, and you can do it vertically, why not do it vertically if you can offer that to your customer base? So that's the change that's going on in the market. That's too out to them.

Patrizio Vinciarelli: If you started at the answer to Phil's, it's not a question, why not do it that way? You couldn't do it that way. You need technology that has got both the high-contact and the high-fans with the enables, you know, a significant fraction of the cap, so you're starting if they're going to have the socket to be swept away. So power savings is going to be as this stuff gets deployed because you can't power it.

Patrizio Vinciarelli: You're competing also with all the EVs out there. The same grid supports all of that plus the data center. So they're also trying to use renewables, but really significantly reducing the impact, you know, when a megawatt scale is massive, value-ad for any of these data scientists, hyper-scalers, you know, it's really important.

Operator: Okay, operator, I think we're going to have to take maybe one more question, please, and then we'll have to wrap it up.

John Valentine: All right, so the last question is coming from John Valentine. We'll go ahead. No, I need you to do it. John, I didn't have my hand raised. That wasn't me. Sorry.

Operator: In this case, we have no more questions. Okay. Thank you.

Operator: Thank you, everyone, for joining the call. Thank you, Rob. Thank you.

Operator: Thank you for joining and have a nice day.