Vicor Corporation (VICR) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Vicor Earnings Result for the Third Quarter ending September 30, 2017. My name is Natalie, and I will be your operator for today. [Operator instructions]. As a reminder, this call is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Jamie Simms, CFO. And also Dr. Patrizio Vinciarelli, CEO of Vicor Corporation. Please proceed.

Okay, thanks Natalie. Good afternoon, and welcome to Vicor's third quarter 2017 earnings call. I’m Jamie Simms, Chief Financial Officer and with me here in Andover are Patrizio Vinciarelli, Chief Executive Officer; and Dick Nagel, our Chief Accounting Officer. Today, we issued a press release summarizing our financial results for the three and nine month period ended September 30. This press release is available on the Investor Relations page of our website, www.vicorpower.com. We also filed a form 8-K earlier today with the SEC related to the issuance of this press release. As always, I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we may make during this call may constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in the call, the matters discussed on this call, including the statements regarding customers, opportunities, sales, growth, spending and profitability, are forward-looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in item 1A of our 2016 Form 10-K, which we filed with the SEC on March 7, 2017. Please note, the information provided during this conference call is accurate only as of today, Tuesday, October 24, 2017. Vicor undertakes no obligation to update any statements including forward-looking statements made during this call, and you should not rely upon such statements after the conclusion of this call. A replay of the call will be available beginning at midnight tonight through November 08, 2017. The replay dial-in number is (888) 286-8010, followed by the passcode 55711863. In addition, an audio replay of today's call will be available shortly on the IR page of our website. I'll start this afternoon's discussion with a review of our financial performance for the third quarter, highlighting certain year-to-date figures and comparisons. Dick will comment on the pending implementation of ASC 606 and Patrizio will follow with his comments, after which, we will take your questions. Beginning with consolidated results. Vicor recorded, as stated in this afternoon's press release, a net loss for the third quarter of $11,000 representing a breakeven for shared figure of nil compared to the second quarter loss of $459,000 or $0.01 per share. Revenues for the third quarter sequentially decreased $821,000 or 1.4% to $56.9 million from $57.7 million for the second quarter. Sales of both legacy products and advanced products declined slightly for the period down 1.4% and 1.6% respectively. Unfortunately, a large supercomputing customer requested shipments scheduled for the third quarter to be rescheduled to Q1 2018, otherwise our revenue from advanced products would have increased sequentially as would have our total revenue. On a year-to-date basis, revenue for the nine months ended September 30, rose 11% year-over-year. Legacy product sales for the current nine month period were essentially unchanged down less than a percentage point but sales of our advanced products were 49% higher year-over-year. International revenue which we identify by the ship to address declined by 6.5% largely due to the timing of shipments of advanced products to Asian contract manufacturers of our OEM customers products. Turns volume that is orders received and shipped within the quarter was $21.5 million representing 37% of Q3 revenue up slightly from the prior quarter. To conclude on consolidated revenue, recognized stocking distribution revenue was essentially flat sequentially rising approximately $100,000 to $5.1 million for Q3. Dick will now make a few comments regardcing our implementation of changes in revenue recognition.

Thank you, Jamie. As addressed last quarter on January 1, 2018 Vicor will be adopting revised revenue recognition guidance under Accounting Standard [Indiscernible] topic 606, revenue from contracts with customers. With the adoption of this new accounting standard we will no longer differ revenue and the associated cost of goods sold when we ship to our authorised stocking distributors. Well with recognized revenue on the shipment to the distributor leaves our facility rather than when the distributor eventually sells the products to the end customer. In other words, the value of the sale will not change but the recognition of the sale will occur earlier upon shipment to the distributor. Similarly cost of goods sold will be recognized at the time of shipment. We will capture the potential value of any subsequent stock rotation and price allowances by booking an estimate of such amounts in the form of the sales reserve at the time of shipment. Such reserves should not and are not expected to yield a materially different net result in terms of Vicor’s recognition of revenue and gross profit from sales to stocking distributors. We do not anticipate this change in reporting will have a material impact on our reported results. Unlike many other public companies affected by ASC 606, we do not have a wide range of complex contracts defining how we do business with our customers. As mentioned, our recognized stocking distribution revenue for the third quarter totalled only $5.1 million. Typically, purchase orders represent the customers offer and our sales order acknowledgment represents our acceptance thereby creating a binding contract for we have a high degree of certainty of payment. From time to time we will enter with a customer into a negotiated agreement which defines mutually specific obligations and responsibilities beyond the scope of our standard terms and conditions as mandated by our sales order acknowledgement. However, we do expect such agreements will present any more of a financial recording challenge than they have under the existing accounting guidance. Beginning with our Form 10-Q for the first quarter of 2018, we will present detailed disclosure describing our implementation of ASC 606 including more information about the nature and character of our identified revenue streams. For more information about the current status of our implementation, please refer to foot note 11 in our consolidated financial statements in the upcoming Form 10-Q for the third quarter which we expect to file with the SEC on or about October 27. Back to Jamie.

Thanks, Dick. Returning to the P&L, gross profit for the quarter sequentially decreased to $25.1 million from $25.9 million in the prior quarter, a dollar decline of 3%, and declined slightly as a percentage of revenue to 44.2% from 44.9%. Gross profit for the Brick business unit which sells our legacy product lines was sequentially steady despite a volume related decline in absorption. Vicor and VI Chip which sell our advanced product lines actually experienced improved gross margins before variances, but volume and mix factors contributed to lower absorption for VI Chip leading to a decline in gross margin percentage for advanced products of less than 1% quarter-to-quarter. I highlight this circumstances Q2 product level profitability for our advanced products was weighted by learning curve cost associated with the ramp of our MCD, MCM components representing our new Power-on-Package solution. We did achieve some of the expected progress in gross margin for Q3 for these and other products, but encountered absorption challenges due to the rescheduling into Q1, 2018 of large MCD, MCM and RFM orders originally scheduled to ship in Q3. We also incurred volume mix and in certain instances production scheduling challenges caused by supply chain delivery problems. As many of you who follow other electronics manufacturers may know lead times for common raw materials and component level requirements have stretched far longer than they have been in recent memory frequently exceeding 16 weeks and in some instances extending to as much as 26-weeks. One of the drivers of our higher inventory balances over recent quarters has been and will continue to be our response to these lengthened lead times as we are building certain safety stock levels of important materials and components in expectation of increased demand next year and potentially continuing supply chain uncertainties. Turning to consolidated operating income, we achieved a modest operating profit as many categories of expense declined notably within R&D reflecting the absence of prototyping cost incurred in Q1 and Q2 with the rollout of our MCD, MCM products. The notable increased occurred in equity based compensation expense although that is a non-cash expense and was heavily influenced by certain awards made in July of this year. Total operating expenses declined 5.4% sequentially. On a year-to-date basis, operating expenses for 2017 were 4.2% higher than the nine months total for 2016 but reflect the aforementioned rollout of MCDs and MCMs for the current period. Non-operating income consisted of lease income from our California facility as well as favourable foreign currency exchange gains. For the first time in many quarters the calculation of our book tax provision is worth an explanation. Our early adopting customer for Power-on-Package in the super computing space is located in Japan, and we service this customer through our subsidiary VJCL. Because of the volume of recent sales by VJCL to this customer, it has recorded an increased level of taxable income. Because VJCL is not a part of our affiliated group for tax purposes, this income cannot be offset with period losses of the parent, and as such we experienced a six figure increase in our year-to-date tax provision. VJCL’s higher income also contributed to a higher value of the minority interest we record to arrive at our net income available to Vicor’s shareholder. As stated in our press release, we recorded a net after tax loss of $11,000 which understates the quarter-to-quarter improvement in our financial performance. So Q3 was better than our reported numbers implied. Another Q3 topic worthy of explanation is our cash consumption. For the quarter, our cash balance declined 2.5 million despite positive operating cash flow. But this was largely the result of planned capital expenditures of $4.5 million, which included over 1 million of deposits on equipment to be brought online this year and the conscious decision to build raw material safety stocks, which cause inventories for the quarter net of reserves to increase by 3.4 million. Inventory turns remained however at an annualized rate of four times and accounts receivable which sequentially declined 1.1 million posted a decline in day’s sales to 43 from Q2’s 45 days. With the increased inventory balance, accounts payable also rose increasing by 1 million. Recall that Vicor has no debt so despite the decline in cash, our balance sheet remains strong and we expect our liquidity and cash generation to meet our operating needs. Turning to new orders for the third quarter, bookings increased to 64.3 million up 8% sequentially. On a year-to-date basis, 2017 nine months total bookings were 17% ahead of the nine month 2016 total with legacy bookings up over 3% and advanced products up 55%. Quarter-to-quarter legacy product bookings were essentially flat, but advanced product bookings increased over 28% sequentially with many orders placed for the first half of 2018. Total one year backlog stood at $60.1 million at the end of Q3, but note the dollar value of backlog scheduled for shipment in Q4 of 2017 remained at roughly the $36.5 million level we have recorded for the prior two quarters, reflecting as I just mentioned the volume of orders placed for 2018 delivery. Employee headcount at quarter end rose to 1001 a sequential increase of 13 of which 5 were full time and 8 were temporary reflecting higher volumes late in the third quarter and the addition of a third week day shift and weekend shifts. Total full time employment rose to 969 from 964. The safety stock we have been building in certain categories of inventory should allow us to better level load our Q4 production keeping headcount in check for the quarter and improving factory absorption. Turning to our outlook, we anticipate net profitability in Q4 and a sequential increase in bookings. However, given the scheduling of our backlog, we do not anticipate a meaningful change in our quarterly revenue for Q4. As Patrizio will address in a moment, we are experiencing the highest and broadest level of engagement yet with potential customers for our advanced products. We believe a number of these customers are approaching completion of their extended product qualifications. We also are hopeful pre production orders will be placed in the coming quarters with substantial production orders to follow. I must remind listeners as I do every time I speak with you of the difficulty of accurately forecasting quarterly sales given the characteristics of sales cycles for disruptive, innovative technologies. In many instances, our advanced products enable customers to enhance the performance of their own products, but doing so requires a time consuming level of evaluation and design work not associated with commodity, pin [Ph] compactible products. Also, with the adoption of our advanced products, customers are seizing opportunities to exploit higher efficiency and power density by redesigning their own boards and chassis which can add delays between their engagement with us and when purchase orders are actually placed. Similarly, the decisions made by early adopting customers and their contract manufacturers and the timing of those decisions are subject to changes brought about by many factors out of our control with the consequence being sudden and unanticipated changes in operating and financial forecast. Earlier this year, unanticipated DDR4 memory shortages caused server production schedules to slip and our contract manufacturers rescheduled our deliveries. Now these CMs [Ph] are facing the same lengthening lead times we are encountering across the commodity component supply chain. With that, I’ll turn the call over to Patrizio.

Thank you, Jamie. As Jamie noted, our third quarter may have looked similar to the second quarter, but financial performance is not necessarily in Vicor [Indiscernible] the progress the insurers [ph] made in design wins or production efficiency. Overall, I am pleased with our [Indiscernible] accomplishments, but acknowledge we have much work ahead. During the quarter, the Dalla Santa [ph] markets -- 48 Volt solutions continue to build as evidenced by the increasing number of engagements, we have with hyperscalers across cloud in Artificial Intelligence applications. As well as XPU vendors serving decent customers and their captive needs. We have broadened our engagement in the adjacent autonomous vehicle, electric vehicles spaces and our penetration of the supercomputing space is expanding. Our expectations for 2018 are based on an existing pipeline including opportunities in aerospace and defense electronics whereas communications, networking infrastructure and solid state lightning. Also included in our 2018 expectations are [Indiscernible] allowed supercomputing installation originally booked for shipments in Q3 that was scheduled to Q1, 2018. Customers are very interested in our Power-on-Package solutions. A Factorized power system consisting of modular current multipliers, MCMs and modular current drivers, MCDs. Our power stage and partitioning technology has enabled our customers to place MCMs within the XPU package, essentially eliminating distribution loss associated with a current by virtue of point of load current multiplication. I spoke about this breakthrough products last quarter, but then compelled to again emphasize the important role we expect and to have [Indiscernible] company from a relatively high mix, low volume vendor serving a fragmented customer base in mature industry segments to a somewhat lower mix, high volume vendor serving innovative leaders in high growth segments. We believe the advantages provided to customers by our unprecedented Power-On-Package solutions and applicable fabiont [ph] or initial [Indiscernible] in the most sophisticated supercomputing and artificial center applications. Complex applications such as data mining autonomous vehicles and artificial intelligence are driving XPU operating voltages well below 1-volt and pushing XPU operating cross to as much as 1000 amperes. Our Power-On-Package solution is uniquely suited for this demanding applications, offering a much efficiently and power density. Such applications are expanding represent the significant growth driver on their own. However, we believe the dynamics are more low, leading to escalating XPU requirements, would drive the combination of very low voltage and very high currents across increasingly sophisticated computing applications, not just those of the leading edge. Our current [Indiscernible] the PRM or VTMs combination for delivering 48 Volt direct to the XPU, all the consumable promise over the years ahead, as our Factorized power approach to 48-volt is increasing to adopted the enterprise server and the center space. However the emergence of 48-volt power distribution, you know the more these systems, holds even greater promise given that our automotive electronics drives industry-wide trends. You know this market, the high level differentiation enabled by Power-on-Package solution is likely through defined by gross presence in market share. I'm sure listeners have questions, so I will open the call. Operator?

[Operator Instructions] Your first question comes from the line of John McKenna. Your line is now open. You may proceed.

Its Don McKenna, Jamie, I wanted to ask you going down to last quarter's shipments, can you give me an idea what the percentage for the shipments or the represented orders received during the quarter?

Yes. That’s the churns figure I gave you each quarter and that number, do you wanted the percentage or the absolute to guess percent.

Given the absolutely that will be great?

So, the absolute as I mentioned was 21.5 million this quarter. The prior quarter was 20.6 and the quarter before that 22.4.

Okay. So if you had a repeat of last quarter we’d be looking at an increase perhaps of the what you’re talking of having 36 right now on hand, that was due for shipment in the fourth quarter that we might be looking at somewhere in the 58 range, more shipments in the upcoming quarters?

That’s a reasonable assumption, yes. The fourth quarter can sometimes be not only surprising, but other time because of the holidays or sometimes even weather patterns that can be disappointing, but that sounds about what our estimate is.

Okay. And I didn’t fully understand the impact on the taxes with the Japanese affiliate?

No, but it does.

Okay.

No, it just simply the question of we had a consolidated calculation of our provision for the full year. And as we quarterly make our way towards that full calculation, that is our quarterly provision shows up in the P&L UC. When we made this calculation for Q3 we had a level of profitability in Japan that couldn’t be applied against our U.S. loss position. So we ended up with a higher provision.

Okay. Can you give us a dollar figure, unless that you have contract was that move shipments in the third quarter to first quarter?

I’ll let Patrishia to speak to that.

It was several million dollars [ph].

Did you say?

Yes.

Okay. That could be anywhere from three to 3,000, right?

I’ll let you guess. It’s a wide range.

I know it is, that’s why asking for you to be maybe a little bit for sophistic?

I think several would be single digits closer to the bottom end of the range you’ve outlined.

Okay. Thank you very much.

You’re welcome.

Your next question comes from the line of John Dillon. You may now proceed.

Hi, Patrizio and Jamie, how you’re doing?

Doing well.

Good. Congratulations on the booking, just really nice number to see. What I’m wondering is that we can see or do you expect another sequential increase of 8% to 10% in bookings for the fourth quarter?

I’m not going to pinpoint the percentage, but we do expect a help increase in the fourth quarter, and as far as I can see quarterly improvements.

Okay. With the backlog is big as it is at 60 million and then you’re predicting a flat fourth quarter. It sounds me like you’re going to have a pretty big step up than on the fourth quarter, because you’re going to have a lot of backlog to ship and might correct in assuming that?

So again, the move to strong in the third quarter, we expected it to be potentially even stronger in the four quarter, given how the backlog is shape at this point in time. As Jamie commented early we don’t anticipate a significant increase in top line in the four quarter. We do expect to see a health increase in the top line starting in the first quarter, because all of the factors that were drawn earlier.

Is there any chance we could see a $75 million quarter in the first quarter. Is that reasonable?

In terms of bookings?

Shipments.

Ship, so its family in the four quarter, no, that’s not the case.

First quarter.

For the first quarter.

So it sounds like everything is slipping to the first quarter of 2018. So….

Yes. So I’m not going to speculate with respect to that, I think that as we’ve know and touched upon in the past that the bookings lead the shipments, the book-to-bill getting to renovate and looking strong in Q4 into Q1 should lead to step-up the revenues itself. Also the factor -- the particular factor that we’ve reference earlier, which is rescheduling substantial multi-million are there from the third quarter into Q1 of next year itself will moves the needle in terms of contributing to Q1 revenues in addition to the effect of the healthy book-to-bill. So, not much of a change in topline at this quarter. A very significant change in export, but beyond that I think we’re going to have to wait and see us through what he is up to.

Great. And it sounds like for your 2018 it sounds like you have been identified to see the substantial growth that you been talking about it. Did I hear that correctly in the prepared remarks?

Yes. I think that in general we’re seeing a lots of development activity coming to fruition, some very exciting new customers that should drive a significant growth, contributing potentially even more than some of our largest customers have today. That’s not going to happen overnight, but it's going to start moving the needle substantially next year or even more so the after that. But we’re engaged on a number of programs with these new customers and they are very exciting. Also with established customers represent a significant share of our business in the past. We got an designing wins. We will continue to designs wins that expand our footprint to new types of applications and some place involving power package. So as I look at both the customer base that is represented the bulk of revenues in recent years and new customers they represent potential being in a complementary spaces, I think we have makeup of some real excitement. At the end of the day this all ties into the transition from 12-volt to 48-volt. That transition is far-reaching. As I think many of us know Google played a biennial role with respect to that back at the beginning of last year in contributing to open compute, its 48-volt solution, I think that began to create significant movement in the industry. I think events that we expect to open in the first half of next year should add a lot of fuel to that far and being about an acceleration in the rate of conversation from 12-volt system to 48-volt system. As noted in the prepared remarks and the press release there’s another factor apply which has do to with automotive. There as you, should know, the early initiatives and I’m going back a long time to move away from the tradition 12-volt bus, had not gather to critical mass, that there is now plenty of evidence for a variety of reasons. That transition, transition we have the more there from 12 to 48 is also beginning to up, it’s going to go and that’s going to be a big factor in [Indiscernible] in terms of content value automotive with the event of autonomous driving with other factors apply. But also it will indirect effect because automotive is a huge market and suggested earlier, the automotive tends to drive standards. So, in one way we’re looking at it. It used to be 12-volt and servers, and datacenters run on 12-volt. As we started hearing from Google, the beginning of last year, datacenters were moving or had move in the case of Google itself to 48-volt. I think there’s more of their accounting and that is all going to be better reforced [ph] but by a transition in automotive and all that puts Vicor in a very unique position because of [Indiscernible] work intellectual property position with respect to technologies that set it on 48-volt does the half both from any kind of high voltage sources here DC to and from 48-volt to the point of load with a factorized power system solutions with PRM or VTM which this point but established as well with Power-on-Package which was recently introduce, so that been adopted by leading customers and evidence at this point is going to become much widely adoptive.

Great.

Sorry the lengthy response, but that surprises all.

So on the beginning of your lengthy response, it sounded me like you may have one and more new Tier 1 datacenters coming online in 2018, is that a good assumption?

I think in some ways this is more exciting that – in that I think we have is advanced designing activity that should pull a 12-volt solution to 48-volt across the whole datacenter space.

Great. I’ll get back in the queue. Thank you so much. Congratulation again. Great bookings quarter. Thanks.

Thank you.

Your next question comes from the line of Hasnain Karim. Your line is now open. You may proceed.

Thank you. So the first question I have is, is there anyone else shipping 40-volt solutions for production order than what you see in the market today?

Yes. It is a number of players but to be clear here. There's no solution that comes close to the power density deficiency and the overall performance of our solution. And also there's no solution that we're aware of that can be and elaborated in terms of Power-on-Package. So, you have to quote one customer in answer to the question. Is there anybody else that we should think of as an alter source for your requirements. This PoP customer was not there's nobody that comes close.

Okay. With regards to the debits on our hyperscale market, you've obviously already hinted that still goes by your customers and that's now pretty much set it out right. Could you talk about how many hyperscale our large data centers, do you expect to move to 48 volt in 2018?

So, we think that as suggested earlier, the combination of Google's initiative and Google's announcement for last year, with the next shoe that is going to be dropped in the March/April timeframe of 2018, that combination will drive widespread conversion to 48 volt. As to the specific of your remainder of the centers are going to be built in 2018, you will see 48 volt technology. I think this conversion is going to take some time because it's quite involved, so we don’t expect that other larger players are going to be able to convert the infrastructure to from 12 volt to 48 volt as early as next year. But they are going to have comparably motivation to do so sooner than later because the handicap of not doing so is going to become that much more significant in the first half of next year.

Okay. So, I'm a little, I think I kind of implied something but I don’t quite understand it. Do you have a new product or new partnership that you're announcing that's going to enable that through some sort of cost initiative or is there something else that our partner is going to announce?

So, we going to record with respect to the policy capabilities. I think I suggested earlier, a Power-on-Package is the heart of a lot of critical initiatives. So, you can expect that to be a significant factor. And that's all we can talk about. I think the developments that we expect to see happening early next year involve partners that we cannot speak for.

Okay. And then with regards to growth in 2018, you expected a majority of the growth to come from shipping into the Data Center cost end market or is there something else that you expect to ramp next year?

There are a number of other things that we expect to ramp next year. If you follow the company for some time, it would be clear that we've been very busy converting huge investment in technology that for many years, of 10 years or more was to a high degree in this age in two actual products that's been announced, that have been sampled to growing array of customers. And many of these products are now turning into real programs that are beginning to ramp. Including initiatives that effectly took way longer than we are anticipating some cases took two three times as long as we're told that were going to take. But they're now really coming to market. Some of these applications are frontend solutions of again support, computing capabilities of one form or another but not at the point of load but getting to intermediate pass from a high voltage source. So, it's not just either as enterprise, it's not just PRMs and VTMs and it's not even going to be just MCDs or MCMs as though as early suggested. This particular products and the particular solution is going to become a game changer. But all this power opportunities are complemented by other products that would begin to lift also the revenue base also shared it with our Brick Business Unit. So, as discussed earlier, we have been in terms of 10,000 feet picture of the net cap of our revenues, we've been in a situation where the legacy business which is not point-of-load, which is not Data Center type of business but it's a high mix business. That is historically right for too long on relatively older products. That business has been relatively flat, at times declining slightly, at times going out slightly. That business will start growing again not because of the old products but because of contributions from state-of-the-art new products. While at the same time we're beginning to see the point-of-load business getting to close to 30% 40% 50% level, that brings about in moving the needle big time with respect to revenues and so forth. So, if the growth rate of the new products, the power component products that we talk about in connection with the center type applications growing rapidly into next year as well as if we cap in the level of activity with respect to frontend and our system solutions that complement the point-of-load.

Okay. And are these are with regards to frontend, are these just a concern, these are products that are going to production in 2018? So, you expect purchase volume purchase orders in 2018 for shipments?

Well, some of them had been in production. So, the multimillion dollar or they now ship in Q3 is now expected to ship in Q1. That happens to where a significant contribution about half of that orders to do with something called in our term which is a frontend product. Takes three face into 48 volts. So, that's a frontend product. That is, yes, the extreme power density high efficiency and complements the point of our solution giving our company's customer a toll of our seasoned solution that is how we sell the art from the three face line all the way to the point-of-load, with Power-on-Package at the point-of-load.

Okay. I guess beyond that you've mentioned that you expect the frontend to be one of the driving forces beyond point of below it I guess. But I was trying to ask is, is that something that are those programs going to production? Are your customers is that looks getting a more conditional role towards that?

Yes. Again, the Japanese customer is one that has been in limited productions going to be larger production soon. There are other customers that would be working on with applications have been developing phase for quite some time with some of the VR products that going, these are pocket of the market but they're also frontend products that will allow to revenue stream 2018.

Okay. And then if you could just describe, I think I'd ask just a couple of quarters ago, but with regards to what gross margin look like as your revenue or it's ramp, I guess as revenue hit into the 60s and let's say low 70s, our corporate gross margin most likely going to increase into the low 50s like they have in the past or the profile in the products you're selling different going forward?

I expect as we get to the $65 million $70 million level, our margins are going to be in the 50s. A large share of incremental revenues that rocks the bottom line, we have a cost model that rewards incremental revenues and conversely in times where the revenues aren’t growing or being stagnant behind us in terms of the margin. So, recent margin levels in the 44% area, we select a revenue level that is in the mid-50s and as we get that revenue level up by $10 million, $15 million, $20 million, the incremental contributions to the bottom line will quickly get 44% to 50% and higher numbers. So, I'm not at all concerned with respect to the margin, before this has been on the top line because from that to the margins getting to where they should be, given the level of proprietorship, intellectual property, uniqueness of the products. That's not difficult at all. And so, we see that on the near term horizon.

Okay. And then my final question is with regards to bookings as all the comments have made, it sounds like you have a I guess a good feel that bookings will continue to increase over the next four to five quarter sequentially. And when I think I asked you this last quarter, you know you had mentioned that or maybe two quarters ago, a lot of call now. You mentioned kind of a slow increase and then a step functioned up because of the Skylake introduction which was a complementary of 48 volt product. Is that I guess is that the type of pace you continue to see sort of a step-ups or more about linear progression through 2018?

That's the picture we see. The issues with Skylake are behind us. I think on a separate front where we've made the inroads without naming names but in a competing let's call it that way, in a competing socket there had been delays, these are known Intel socket and the competing with some of the Intel processors. There are being delays that echoes some more revenue opportunity to also move to the right and thus being part of the issue with our earlier forecast for the second half of this year. Not only do you expect a healthy contribution in the third quarter from the super large supercomputing application but we also based on earlier predictions has expected a significant a stable significant contribution from a non-Intel socket that was here to ramp in the fourth quarter this year. And because of a variety of reasons that's moved to the right. But overall, these initiatives are at this point. We are potential, I can guarantee that they're all going to come to fruition it's that technology and it's very competitive and sometimes we worked customers get promised in terms of solutions not by us but others doesn’t quite spin out. And that causes, but looking at some of all of these initiatives and there’s reason to be optimistic about the revenue opportunity next year.

Okay. Thank you.

You’re welcome.

You have a question online. That question comes from the line of John Dillon. You may now proceed.

Hi, again. Just wondering if you have any update on this new facility or an additional facility, additional plan?

Yes. So we’re completing the due-diligence at some specific plans. We may break ground that’s earlier as April, 2018 with the target date of first quarter of 2019 for occupancy.

So it sounds like you’re looking at actually building whole new plan that not lease in the someplace?

Yes. We’ve renovated various alternatives. It’s not casting concrete yet, but I sure look like its going to be building facility to aspects.

Great. It sounds this is really -- this is on your plan, this is definitely on your plan. It’s not a wishlist, its something you’re planning for it?

Yes.

Great. Its getting late, so I’ll let you go, but thank you very much and again congrats. It looks like things are really moving along. Thank you very much.

Thank you. If there’s another question I will take it.

All right. We have one more question online. That question comes from the line of Alan Hicks. You may now proceed.

Good afternoon. To follow-up on some of your comments on the front-end applications and that’s area of BBU revenue line I assume. You had some orders last quarter, you said orders increased by 6 million in that area and had one customer of 4 million that you would ship to next year. Is that still on track?

I think what you’re translating is a combination.

Yes. That was okay.

I think, Alan you’re accurate.

So about half of the bookings and revenue opportunity with the supercomputing application is a front-end product.

Okay. I wasn’t clear on that before. And you also mentioned that and the big picture that could be a horse race between amount of revenues you get between front-end and point of load applications?

Well, so saw, obviously the bulk of revenues has been a big business which you could view as power system business, front-end business is certainly given it phases [ph], 30-year old power component paradigm, if not a point of load to power component paradigm and the density of those kinds of products using the 40, 50, 60 volts per cubic inch, a point of load solutions are for 1000 volts per cubic inch, so its not even a close contest. The front-end products and big products once again have provided a revenue base that’s enabled us to make the investments and the technology of development, the power level development thus lay the foundation for a phase of growth that I believe is now truly starting and which again well to high degree fueled by point of load applications and these are again typically 48-volt to in the case of Intel Processors 1.8 volts, in the case of GPUs, XPUs, A6 typically 0.8 volts, [Indiscernible] case is more than that, that’s where all action is going to be, but again coming back at to front-end business we have holistic view of the entire power system challenge. And as evidence with our customer in Japan we can in effect uniquely support the entire system requirements from in that particular case, the AC source to the point of load or high-voltage DC source to the point of load, and so we see over time a significant contribution, as significant in terms of revenue share coming from front-end type business. And the basic engagement as we reference earlier is indicative of these embed again half of the revenues have to do with front-end particular system, the other half has to do with the point of load stuff. So, in the short term the growth is going to be continuing primarily from the point of load stuff. That's were comparing this past quarter to the corresponding quarter of last year we’ve seen roughly 50% increase. That's the kind of growth we expect to continue to see in point of load stuff. Its going to be a while before that kind of growth gets to be leveraged with the front-end business, because with some notable exceptions of these additional work that needs to be done to address those kinds of opportunities with key customers in the front-end, but key customer are very much interested in what we have contribute in the front-end just like the very interested in our point of load solution. They appreciate the fact that we have unique technology, its truly enabling, it does make a difference in many ways, most importantly in giving them a competitive advantage relative to their own competitors, and they want to scratch to the effect possible that advantage not just the point of load stuff, but also in terms of front-end capability. So we’re frankly getting a lot of pool from the customer base with respect to sharing our front-end solutions. We are holding back to get them to a higher level of maturity and general capability before taking the next step, but as we do that in 2018 I expected to see a broadening base of acceptance for front-end solutions that should contribute to the big business or the front-end business, power system that as characterized Vicor for quite some time.

I guess the point I’m trying to get out is that BBU revenue line has been declining from an 15 years or so, it sounds like..

Not really declining for 15 years, but in fact to say, its not being going anywhere for 15 years, so its going up a little, down a little, its share has not gone anywhere. And we still doing that, I guess if we compare what we this year to last year its not that – it sideways. So the mission there is to start lifting by leveraging the new technology in the best price. Again, that’s going to happen overnight, but I think we have some early evidence of that opportunity, and as we get little further long in terms of the maturity of those front-end systems we’re comfortable with enabling then with a volume may seem customer we’ll be doing that. And they are asking us to share what we have.

Well, I wanted to get to the point that it sounds like you’re transferring to me a new technology, advanced technology to their older applications, power systems and front-end applications?

We are and there is simply reason for it. This common dominator engines, meaning power conversion, topologies, a control systems and most of all packaging technology, so a very unique packaging, the packaging technology that enables Power-on-Package, MCM and MCDs and in advanced PRMs and VTMs, that technology, the chip convert the hosing [ph] package technology, that same technology supports – it’s a platform that supports a much large chip for front-end applications with power capabilities ranking up to 6, 8 kilowatt per chip. So if that capability that we’re beginning to deploy to address front-end applications again leveraging a very common denominator capability. But [Indiscernible] are somewhat different, they are complimentary but it’s something that again we’ll take some time to fully develop but particularly with major customers.

Okay, so you think you can reinvigorate that revenue line?

I think that ultimately half of our business in very rough terms should come from the part of the power system that takes power source and lands it up 48 Volt on the way to the point of load. So as the Factorized Power solutions going from 48 to the point of load by way of PRM and VTM ore Power-on-Package continue to grow, we will have some couching have to do with the front end but I’m confident that the front end revenue opportunity will roughly equal the point of load opportunity. And again, we have real evidence of that with the first customer what we have actually enabled that kind of a complete solution, as that kind of implementation gets spread to other larger customers that have adopted thus far low solutions of special interest in the front end but have not yet been even exposed to their capability. As they get exposed to it and eventually adopted they should contribute just as well in terms of front end business.

Okay, well thank you very much.

You’re welcome. And with that, thanks a lot and we’ll be talking to you in February. Have a good day.

Ladies and gentlemen, that concludes today’s call. You may now disconnect and have a wonderful day.