Good afternoon, ladies and gentlemen, thank you very much for joining today's Vicor Earnings Results for the Second Quarter ended June 30, 2018. [Operator Instructions]. And now next, I'll introduce our host for today. We have Mr. James Simms, CFO; and Dr. Patrizio Vinciarelli, CEO. Go ahead, please.

Thank you, Bart. Good afternoon, and welcome to Vicor Corporation's earnings call for the second quarter of 2018. I'm Jamie Simms, CFO, and with me here in Andover are Patrizio Vinciarelli, CEO, and Dick Nagel, CAO. Today, we issued a press release summarizing our financial results for the three and six months period ended June 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'll remind the listeners this conference call is being recorded and this is the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on the call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements as well as forecasts sales growth, spending and profitability are forward-looking statements, involving risks and uncertainties. In the light of these risks and uncertainties, we can offer no assurance that our forward-looking statement will, in fact, proved 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 2017 Form 10-K, which we filed with the SEC on March 9, 2018. Please note, the information provided during this conference call is accurate only as of today, Tuesday, July 24, 2018. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call. And you should not rely upon such…

Thank you. As reported in our press release and addressed by Jamie, the second quarter of 2018 was characterized by a substantial increase in EPS, net of higher material costs and one-time charges. Total bookings increased sequentially to $87.5 million, the 10th consecutive quarterly rise, reflecting the long anticipated transition from 12-volts to 48-volts in data centers. We believe that, before too long, a similar transition will gain momentum in automotive. Of the point-of-load, Vicor is uniquely positioned to enable high performance CPUs, GPUs, and artificial intelligence ASICs for AI applications including cloud computing, autonomous driving, 5G mobility, and robots. It is worth noting that parallel computing, artificial intelligence ASICs built on a seven nanometer node, and consuming as much as 1,000 amperes, cannot be efficiently powered without VTMs or MCMs using Vicor Power-on-Package technology. And 1,000 amperes is what it takes to expand computing beyond the limits of Moore's Law. With the transition from 12 to 48-volts, Vicor is also uniquely positioned to provide high density front ends, supplying 48-volt hubs from AC voltage sources, doubling our market opportunity, while enabling Vicor customers to leverage complete, high-density power systems from the source to the point of load with 48-volts. To meet rising demand, we're expanding capacity, initially in our 250,000 square feet Andover factory and, in approximately 18 months, with a second facility, specifically designed to manufacture proprietary ChiPs (which stands for “converter housed in package”), the package technology needed to enable Power-on-Package. As always, I'd like to limit my prepared remarks to a minimum as I would rather answer your penetrating questions. So I will open the call. Operator?

Thank you. [Operator Instructions] Our first question coming from Ken Farsalas from Oberweis Asset Management. Go ahead please.

Good afternoon. I'll start with two questions. And then hop back in the queue and give others a chance. But can you be more specific in your capacity expansion plans going forward? I know last quarter you spoke a little bit about the potential for using a third-party to help you with the manufacturing side. Can you just expand a little bit on what your plans are at this point to increase your capacity going forward?

Yes. So, as discussed in earlier calls, we have lined up third parties to facilitate certain process steps which can be taken out of our manufacturing lines in Andover to both align ourselves with certain core competencies and facilitate expanding other capacity within the Andover factory. With this initiative, we believe that the Andover factory can support upwards of $0.5 billion in sales. We are, in parallel, pursuing opportunities for expansion in our general area, like New Hampshire but possibly Massachusetts, and we're looking at a variety of opportunities. And we'll be closing in on these opportunities in the near future, anticipating that the second factory will be up and running in approximately 18 months.

Okay. And were there any 10% customers in the quarter? And if there were, was anyone new to that list in the current quarter?

There was no 10% customer in this past quarter.

Okay, great. I’ll get back in the queue. Thank you so much.

Thank you.

Thank you. Our next question is coming from Matt Vigneau from Shay Capital LLC. Go ahead please.

Good afternoon, as well. And my question is related to the previous one. But noting that the company has achieved the best gross margin in recent years and the continued progress expected in sales, I'd like to ask about how many -- how much more efficiency can be achieved out of the existing facilities in Andover from a gross margin standpoint? And then part B would be, as you contemplate the additional facility 18 months out, when this comes online, would it be reasonable to expect a step back in gross margins? Or with the additional capacity, it'd be possible in a format that maintains your gross margin progress? Thank you so much.

Thank you. So first with respect to expanding capacity within our existing facility. As you can imagine or as implied by discussions that have taken place in the past, we have a largely fixed cost structure associated with -- particularly in this area-- manufacturing overhead to facilitate the unique processes and capabilities we have developed in our factory. These resources will not have to scale up anywhere close to direct proportion to the increases in revenues that can be supported from the Andover factory. In other words, as we get to the roughly $300 million level (as of the most recent quarter) to $0.5 billion level, I do not see the bulk of our manufacturing infrastructure growing in cost by more than, I would say, high single digits. So with that, we anticipate significant improvements in margins. We also expect to be able to achieve -- and reduce material costs, associated with larger volumes. So all this should support an expansion of margins. So I should note though, that with respect to the material cost component, I suggested in the prepared remarks and as noted also by Jamie, particularly with respect to certain commodities in recent quarters -- they’re really not commodities anymore because of the demand level (laughter) -- so, with respect to those components, there's an issue that will settle out, and again, looking from 10,000 feet, the material cost structure of the products will be going down to some degree with increased volumes. Now with respect to second half of your question -- to your point, as we begin to invest in the new facility, we're going to have to start depreciating that facility and the equipment that goes in it, and we're talking tens of millions of dollars of equipment. But however, as suggested in earlier calls, we are first taking the steps necessary to expand capacity within the existing facility to increase the margins well above the recently reported 48% before we begin to -- have to -- carry the additional cost associated with a new facility. Also in regards to the new facility, as suggested in the prepared remarks, this is going to be a facility that will be designed -- is being designed -- from the ground up to make the manufacturing of ChiPs, our unique packages that support the new products in the most efficient manner, more efficiently than with the existing facility. So in summary, there's going to be continuous improvement over the next four quarters. At some point, there are going to be negative contributions, rising from additional depreciation. But those are going to be absorbed by the higher revenues. And ultimately, we are going to be benefiting from the greater efficiency of manufacturing line that is architected to make best use of resources in making ChiPs. Something that when the Andover facility was originally designed, it wasn't even a figment of anybody's imagination.

Thank you for the insight. And best of luck.

Thank you.

Our next question comes from John Henderson from Kershner Trading Group. Go ahead please.

Hey, guys. Congrats on the forward progress, exciting.

Thank you.

One question regarding the cadence of orders on your last call, I think you had provided investors with the expectation that orders would grow sequentially throughout the year. I was just checking in on that front, are the expectations still the same?

Yes. Expectations are still the same. Thus far, this quarter, we are ahead of the prior quarter, about the same rate as last quarter.

Understood. And looking further ahead, is there any type of acceleration that you can talk about for Q4 for next year? Is it just too early, yet?

I think it's too early. There's a lot of moving pieces. I suggest in my prepared remarks that within the last several months, we've seen change having to do with the main initiatives on the AI front. The inference that many have come to make regarding the fact that when you need to power an ASIC with 400, 500, 600 amps of current consumption at 0.8 volt or 0.7 volt, the historical solution going through a 12-volt bus and a large multiplicity of buck regulators no longer works. The saying “the buck stops” comes to mind, or “the bucks stop there”. They stop at a few hundred amps, practically speaking. So we're seeing a lot more opportunity developing on that general front. Also suggested in my prepared remarks, we're also seeing more opportunity taking customers from their AC sources to the 48-volt bus. We already had one such engagement in Japan last year. I believe that this is a precursor to future engagements of a similar kind. We're going to be providing the complete solution from the AC source to the point of load through Factorized Power building blocks all the way. So all these things will contribute to near term and longer term growth opportunities. As far as I can see.

And a final question. I know when I attended the investor meeting or your annual meeting, you referenced Waymo as a customer. And in Google's conference call, they referenced how autonomous vehicles usage was 8 million miles. And it seems as though the opportunity has barely begun. Are you still of the opinion that it's going to be 2022 till we see full-fledged adoption there?

Yes. We believe from a variety of sources that the promise of Level 4 and eventually Level 5 autonomous driving is coming to fruition. I think it is going to start happening with the fleets for particular purposes in the July timeframe. We are very excited to be engaged in the best applications of this kind with, I think, companies that have had the great leadership in that challenging field. So this is a first step in our entry into the automotive space. We believe we've considerable opportunities going beyond the autonomous driving opportunity. GPU use is another area of opportunity in the general space.

Okay. Thanks so much guys.

Thank you.

Thank you. The next question is coming from Mark Lanier from Pegasus Capital. Go ahead please.

Thank you. One of my questions has been answered. The other one has to do with the subject of tariffs. I understand the full range of uncertainty that surrounds this issue to a degree, but I wonder because you mentioned it previously in the call, what thoughts you have about the levels of exposure you may have for potential tariffs that people may be predicting? That would be helpful.

Well, so it's obviously a very fluid situation. I have yet to predict what is going to happen. Thus far, we have not incurred significant incremental costs due to any tariff. We do not know whether there would be any real impact from any of the tariffs. Obviously, there's been talk of potentially having tariffs applied to all of the Chinese imports, in particular. And we do source from China, certain components. But I would say on a general level that throughout the electronics supply chain, tariffs are going to have to be absorbed and, to the extent that they stick, passed along to customers. Obviously, if it is -- if there’s minimum impact, that we're going to absorb them for goodwill. If it were to become more significant, we'd have to reflect them in the price of the product. I hope that answers your question.

Thank you. Our next question coming from John Dillon from D&B Capital. Go ahead please.

Hey, guys. Congratulations. Really great quarter, in particular, the backlog numbers. I think a record -- all-time record. And also, it's really nice to see you generate that much cash, really, really nice job.

Thank you.

So my question is on the bookings. I want to just see if I could get a little more color on the bookings. With the NBMs and the Nvidia opportunities hitting in the fourth quarter, I think Nvidia announced there's going to be shipping production quantities. So they're new systems in the fourth quarter. Can we expect the bookings to have a sequential increase this quarter?

Yes. As I mentioned earlier in answer to an earlier question to third quarter bookings, we are substantially ahead of where we were at this time last quarter.

Okay, good. Could we expect a 10% increase, you think on that?

Well, I'm not going to make a two digit -- accurate prediction with respect to that. Let's wait and see what happens. But I think we are continuing to see improvements there on the demand side.

Have you had many bookings for the Nvidia stuff yet? Or is it still coming this quarter…

We're not mentioning customer names. But generally speaking, we are seeing bookings from all of our new programs, including ones that have been made public.

Right. And you mentioned supply chain constraints, do you feel that, that's going to slow down your revenue? I mean I heard from Jamie, you are expecting a sequential increase in revenue. But I didn't hear any kind of, is it going to be a substantial? Or just a marginal increase in revenue?

We're going to see a substantial increase in revenue. I think availability of certain components, in particular capacitors and power semiconductors, has been an issue. There have been some price increase in the general area. We solved those. We incurred the increased costs in Q2 because of those. But we've been able to get the components we need in order to take care of our customers.

Okay. Great. So you have the parts. You're just going to pay a little bit for them?

Yes.

Yes, and one last thing. You said you're extending the performance beyond Moore's Law with new seven nanometer. Can you explain that a little bit more? Is it because the way you deliver power, you're enabling these artificial intelligence systems? Or how does that...

Yes, so typically -- we're not in the business of making the CPUs or GPUs far from it –

Obviously.

Our business opportunity is limited to enabling solutions, best-in-class solutions, which notably require higher power. And the point there is that it has become very clear that, number one, Moore's Law has had a long run and a great run, Intel was for a long time able to keep raising the bar on performance. I think it's no mystery that Intel CPU is not in recent times made progress at the rate of early times. So Moore's Law has been, if not hitting the wall, has been coming into a different area of maturity and slowdown. On the other hand, Nvidia is the prime example with its GPUs, has been able to accelerate, no pun intended, performance of ASICs that are developed on and with a different methodology, and on processes that require power delivery of the level several hundred amperes and voltage nodes, well beyond 1 volt. So that fundamentally different from the Intel paradigm. So Intel paradigm has been predicated on a different computing architecture. And on an internal regulator methodology that sources power, typically a 1.8 volt. So what you have in the computing field is again, the Intel paradigm, which continues to leverage Moore's Law based on 1.8 volt fed to the CPU at typically 100 or 200 amperes, on the one end. And then you have the GPUs and other kinds of ASICs that are operating on seven nanometer node, typically TSMC in Taiwan. And from those platforms, they can achieve very high level of power on computing performance. But at the cost of having to feed those devices with 0.8, 0.7 volt to 400 -- 400, 600 amperes and rising. It's those kinds of computing platforms that are going beyond the limits of Moore's Law. And it is those kinds of computing platforms that with our ChiPs and with our Factorized Power solutions, with our VTMs, or even more so, with our MCMs, with our Power-on-Package technology, we can best support.

Got it. Thank you very much. And again, congratulations.

Thank you.

Thank you. Next one, we have Ken Farsalas from Oberweis Asset Management. Go ahead please.

Thank you for taking the follow up, I appreciate it. Just two more questions, quickly. The new facility. You talk about an 18-month timeframe to have that facility up and running. Is that being driven by specific customer demand forecast that your customers have discussed with you? In other words, what visibility do you have over that timeframe for the need to have that type of revenue capacity? And what do you think the CapEx would be for the new facility, roughly?

So the math is roughly the same, all right? We're growing at 30%, 35% annualized rate. And in the most recent quarter, we were at an annualized $300 million rate. So just a linear speculation, I don't want to draw a line here. But I am answering your question, in effect, at a high level. In 12 months, with a 30%, 35% growth, the $300 million turns to $500 million. And six months after that, we get pretty close to the capacity limits of the Andover facility. And obviously, we would not want to be that close to the capacity of the Andover facility. So we want to get a new facility up and running ahead of an actual need. Now, having said that, there is elasticity, we expect some level of elasticity with respect to the expected capacity of our existing Andover factory. We've been creative in the past with respect to thinking out ways on how to get more capacity out of the certain space. And I'm sure there is still opportunity for some further expansion in that capacity should the need arise. So this is roughly speaking, the math, the sense behind the need to have another facility in place in approximately 18 months. Whether it's going to be 13, 14 months, or a little longer than 18 months, it's going to depend on how more capacity we can get out of Andover and what actually happens with respect to demand from particularly large customers. And our customers are larger. We have a more and growing statistical base of customers. So that's general rising the tide. And within that, there are some very large customers. Even though, we haven't had one in last quarter with more than 10%. We may well have in the next year greater than 10% customers, maybe one, maybe two. So their unique demands will also drive to the decisional point with respect to the additional capacity.

Okay, great. And Jamie, just more of a housekeeping question. You talked about the revenue split between advanced products and legacy products in the quarter?

We did not in our remarks. But I believe we do in the filings.

Generally speaking, I would say that both -- we look at the business as our power component business, at the point of load and the power system business for the front-end. The power system business includes within it the legacy business of the classic Vicor bricks. Both businesses are growing. The growth rate of the power component business is (the point of load business) significantly higher than the power system business. But as suggested earlier, I would expect before too long the power system business growth rate will increase. And long term, both business units should grow at comparable rates.

Next question coming from Wally Walker from Hana Road Capital.

Thank you for taking my question, and let me add congratulations on another great quarter. And your backlog is growing as rapidly and significantly as it has. How should we think about the trend in converting that into revenue? And with Q2 a reasonable template for doing so?

Yes. I think that as suggested in the prepared remarks, we see the point where it is an important contribution growing the top line. We’re not spelling out exactly how much because a variety of factors. But we see growth that is going to bring about further expansion in the margins. We expect to get to -- across the 50% level on gross margins, as the top line increases to a level that will bring about further economies of scale.

Next question coming from Alan Hicks from Ainsley Capital Management.

Can you give us an update on the RFM product?

So, we have begun to branch it out into particular models for a broadening range of customer opportunities. So, the initial engagement, as you might recall, was with a Japanese customer I referenced earlier -- that was the first, we provided a complete solution from what in Japan is a 200 volt, three-phased AC source, all the way to the point of load. By way of larger arrays, a multi-megawatt installation, large arrays of RFMs, you would call front end systems, delivering 48-volt hub the power required to drive MCD and MCMs systems, powering a large array of CPUs. Their initial system is paving the way for new engagements with a number of customers that will not use the same 200 volt RFM, because that kind is specific to the Japanese AC mains. What we'll need for other engagements are versions of RFMs that enable the conversion from 400 volt and 480 volt AC sources. Those are coming together. We're having customer demonstrations in the next few months. Again, setting the stage for RFM sales and complete solutions from the AC source all the way to the point of load.

So initial product in Japan that was sort of just -- was it like a custom application for them? Or was…

Well, it was a solution. Again, for the Japanese AC source, which happens to be 200 volt. To apply RFMs into data centers and other applications on a global scale, it takes variations on the initial RFM. It's fundamentally the same product, it is just the minor alterations that enable it to operate from 400 or 480 volt sources. So we've completed those improvements and those are in demonstrations. And are engaging now in -- or beginning to engage in -- demonstrations with a number of interested customers. So there is a great deal of interest in this product for a number of reasons, one, is obviously the 48-volt hub getting sold in various end markets and needing to supply the 48-volt hub from a variety of sources, including particular three-phase AC sources. In other factor of play is liquid cooling. The RFM is uniquely adapted to be cooled, either in Fluorinert, in an immersion, or with more conventional water cooling, which conventional AC-DC front ends are not nearly as capable of doing. In other words, we can support much, much higher density in the front-end than conventional AC power systems can. Because of the unique attributes of the RFM. As you might have read, liquid cooling is coming-of-age because of the drive to a higher density in racks and generally speaking, in a variety of systems. So all these factors converge to the merits of our solution, it's architected in, performing conversion from the power source to the 48-volt hub, followed by, in particular, Power-on-Package, MCD-MCM systems, taking power from the 48-volt hub and delivering it to the point of load.

So would you say you're standardizing some products based on the original application with PEZY?

Yes. Yes. We have a standard product now that is -- can be configured to convert power from either 400 volt, 200 volt or 480 volt to a 48-volt or 54-volt hub.

Okay. So how soon do you think there will be shipping in volumes?

Well, so I think we are engaging with customers that have some interest, I think, to manage expectations in this regard, I should point out that we are dealing with our product, it's not a consumer product, it’s got a gestation period in terms of the design-in cycle, it gets measured in, as a ballpark, 12 months. I think best case, it can be -- it'll be shorter than that. In some cases, it can be 1.5x or 2x depending on the nature of the customer and the application. But I think it is something that as we look out one year to two years, will begin to make a substantial contribution to our revenues. And by the way, the Japanese customer will be buying for 2019 substantial new volumes of RFMs as well. So it's not that we get a dry spell from here until broader shipments of RFMs.

Have you shipped, I think if I remember right, it was $8 million order from the Japanese customer?

Yes, it was very substantial, at the time.

Is that already shipped?

Yes.

But that's not included in backlog, then?

No. That was shipped last year.

Oh, last year.

That was last year. It actually contributed in recent quarters. But those systems with the particular customer will come back in significant volume in the first half of 2019.

They had another larger system they were developing, is that...

A larger scale system.

Then, was it -- it was maybe a year or two ago, I think Jamie mentioned, you might be having any revenue line called power systems at some point. And I would assume that the product like RFM...

Yes, they fall in that category. Absolutely. So the RFM is a prime example of a power system product -- not the only one introduced -- the NBM is also a power systems product. So generally speaking, power system products are unlike power component solutions, they are devices -- converters -- that take a power source and convert it to some hub, whether 48-volt, 12-volt, as the case may be, to -- and these are in effect intermediate wattages to the point of load. You can think of it as a steppingstone, fundamentally in our kind of power conversion, the power comes from a source, typically high wattage batteries or an AC source, single phase or three-phase, and to get to the point of load, to get, let's say, to an AI ASIC. Ideally, it would take a first step from the source to 48-volt (and sometimes with 54-volt). And then from 54-volt or 48-volt, as the case may be, directly to the point of load. That hub is, if you will, using an analogy of an airline, like having airplanes that take the customers from any initial airport to a variety of destinations by way of hub. A voltage hub plays the same role. We take the power from a variety of sources, take it to 48-volt on its way to the point of load. And the power system business has to do with taking that first step.

And I think you said at one point, power systems part of the business could be 50% of all your revenues?

Yes. Because fundamentally, it’s the same amount power, right? The power is essentially conserved. So these systems are typically -- have an efficiency in the '90s. So whatever is consumed, let's say, by ASICs, I guess supply, if it gets supplied by a Factorized Power solution, comprising PRMs, VTMs or MCDs, MCMs, that same power comes out of the 48-volt hub and this will be delivered and needs to be replenished at the 48-volt hub by front end systems. So what you're dealing with is the same power delivery through this series of two steps. And the value proposition with each of the two steps in terms of cents per volt, is fundamentally is in the same ballpark. So that's the simple math stands behind the factor of two.

One last question. I was looking at the last 10-Q. And it was about the eliminations. So I think you did $8.2 million, I think in Picor revenues. But it's reported as $4.5 million because part of it goes into the BBU revenue line, is that how that works? James Simms Yes.

Well, so what is going on with that, is that part of the very important role that Picor has played and continuous to play within Vicor at large. It is the source of all of our ICs. So we don't make typically an IC. But we do design, develop, and get fabricated a variety of Vicor microcontrollers, these are ICs that Picor designs, develops and provides to Vicor as a whole. And so they're being in the company sales having to do with those ICs.

We're getting to pretty much the end, so if there's one more question.

Okay. Next question coming from Jim Bartlett from Bartlett Investors.

Real quickly. On the new facility, assuming 250,000 square feet, what will be the capital cost?

I'm not going to spell out a number. But it is several tens of millions of dollars, all in. It's not going to be all in on day one. But obviously, the space itself and then a considerable amount of equipment going into that.

Is it just going to be 250,000 square feet or could it be more?

Well, so we're looking at options that may include more than enough land required to support 250,000 square feet. But I'm not sure that we're going to adapt on a campus that can support that. So these are all the factors applied. And this will get started out in the next few months.

Okay, and congratulations again that last quarter and where you’ve positioned the company.

Thank you.

With that, thank you, and we’ll be talking to you in three months.

Thank you, ladies and gentlemen. You may now disconnect.