Vicor Corporation (VICR) Q1 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Vicor Earnings Results for the First Quarter Conference Call. My name is Linda, and I will be your event manager today. During the presentation, your lines will remain on listen-only. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And with that, I would like to hand over to Dick Nagel. Please proceed.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the first quarter ended March 31, 2021. I'm Dick Nagel, Chief Accounting Officer. And in Andover are Patrizio Vinciarelli, Chief Executive Officer; Phil Davies, Vice President of Global Sales and Marketing; and Kemble Morrison, Vice President and Corporate Controller. After the markets closed today, we issued a press release summarizing our financial results for the three months ending March 31. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of 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 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 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 2020 Form 10-K, which we filed with the SEC on March 1, 2021. 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, Thursday, April 22, 2021. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call, and you should not rely on such statements after the conclusion of this call. A replay of today’s call will be available beginning at midnight tonight through May 7, 2021. The replay dial-in number 888-286-8010, followed by the passcode 66693367. This dial-in and passcode are also set forth in today's press release. In addition, a webcast replay of today's call, along with the transcript will be available shortly on the Investor Relations page of our website. As noted in our press release, dated April 6, 2021, we announced the appointment of Jim Schmidt as Chief Financial Officer effective June 1, 2021, succeeding Jamie Simms. Jim will also join the Vicor Board of Directors and serve as the Company’s Treasurer and Secretary. We are looking forward to having Jim join the company. I'll now turn to a review of our Q1 financial performance, after which Phil will review recent market developments, and Patrizio and Phil will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for year-over-year comparisons. As stated in today's press release, Vicor recorded total revenue for the first quarter of $88.8 million, up 5.3% from the fourth quarter total of $84.3 million. Quarterly Advanced Products revenue rose 2.2% sequentially. This growth was constrained by limited component availability due to global semiconductor supply allocation issues experienced during the quarter. Brick Products revenue rose 7.6% sequentially, reflecting a resumption of shipments to our European customers after the pandemic-related trough of 2020, while Asian customers grew 18% from Q4 2020. These increases offset a modest sequential decline in shipments to North America. Shipments to stocking distributors rose 79% sequentially, primarily due to an increase in Brick Products shipments. Turns volume also increased sequentially. Exports for the first quarter increased sequentially as a percentage of total revenue, approximately 69% of consolidated revenue from the prior quarter 64%, reflecting the factors just mentioned regarding Europe and Asian shipments. For Q1, Advanced Products share of total revenue declined slightly to 39% compared to 40% for the fourth quarter, with Brick Products share correspondingly increasing to 61% of total revenue. We believe Advanced Products sales growth will expand significantly as a percentage of total revenues, especially once new manufacturing capacity comes online, given the high-growth segments we have penetrated with our 48-volt technology, including AI, data center and automotive, in contrast to the maturity of the segments we serve with Brick Products. Turning to Q1 gross margin. We recorded a consolidated gross profit margin of 50.3%. Higher volumes and improved mix contributed to higher profitability as did a reduction in cost variances and tariff charges. Gross margin dollars rose 11% sequentially. While margins remain under the pressure of high tariff charges, Q1 charge declined approximately 33% from Q4’s charge of approximately $1.5 million. We expect to see further improvement through 2021 in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q1 operating expenses. Total OpEx rose just under 4% sequentially, but consistent with longer-term trend, reflecting periodic swings in discretionary spending. The amounts of total equity-based compensation expense for Q1, included in costs of goods, SG&A and R&D were approximately $228,000, $853,000 and $490,000, respectively, totaling $1.6 million. For Q1, we reported operating income of $14.7 million, representing an operating margin of 16.6%. The sequential 27% increase in operating income reflects the operational leverage in our model. Turning to taxes, we recorded a net benefit for Q1 of $143,000, representing an effective tax rate for the quarter of minus 1%. Net income attributable to Vicor for Q1 totaled $15.1 million. GAAP diluted earnings per share was $0.34 based on a fully diluted share count of 44,841,000. Before I turn to our financial position, just a brief update about COVID-19 and our workforce. As previously discussed, the designated essential manufacturer using masks and practicing social distancing from the onset of the pandemic, we have continuously operated three shifts at our Andover manufacturing facility. While we have seen a small increase in cases, again, recently, cases are below the levels experienced in the December through January timeframe and absenteeism has declined. Nevertheless, because much of the potential influence of the COVID-19 pandemic is associated with risks outside of our control, we cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur. Turning to our cash flow and balance sheet. Cash, cash equivalents and short-term investments totaled $223 million at Q1, a sequential increase of 5%. Accounts receivable net of reserves totaled $47.7 million at quarter-end, an increase of 16.3% over Q4 with DSOs for trade receivables steady at 38 days. All balances are current. Inventories net of reserves declined 5.3% sequentially to $54.3 million. Annualized turns improved to 3.11. Reflecting the positive operating results, operating cash flow totaled $17.6 million for the quarter. Capital expenditures for Q1 totaled $9.3 million. We ended the quarter with a construction in progress balance of $19 million, leaving approximately $38 million of our capital budget scheduled to be spent through the year. Our factory expansion project is proceeding on schedule and on budget. I’ll now address bookings and backlog. Q1 bookings totaled $99 million, 8.1% sequential increase. The overall book-to-bill was approximately 1.1 with Advanced Products at 1.4 and Brick Products at 1.0. Q1 bookings largely reflected the same circumstances we saw with shipments, growth in Europe and Asia with a modest decline in North America. At year-end, one-year backlog totaled $157.1 million, an increase of 6.5% sequentially. Turning to our outlook for the second quarter of 2021. We expect revenue growth. We continue to address the sources of gross margin pressure and our forecasting improvement and product level profitability. Further, we do not anticipate any meaningful increase in operating expenses. While substantial further improvements in gross margins will have to await, production from our new vertically integrated factory, we expect incremental revenue to drive earnings per share given the scalability of our operating model. With that, Phil will provide an overview of recent market developments, and then Patrizio and Phil will take your questions. I ask that you limit yourself to one question and a related follow-up, so that we can respond to as many of you as we can in limited time available. If you have more than one topic to address, please get back in the queue. Phil?

Thank you, Dick. Well, we are off to a great start in 2021 with bookings increasing to range of markets and regions globally. Our legacy product bookings was strong as was our data center, supercomputer and AI customer demand. With respect to supply chain challenges that the industry is facing, we have recently increased lead times to 32 weeks for Advanced Products and 26 weeks for legacy products. Our manufacturing capacity for Q2 and Q3 is essentially built and new orders subject to standard lead times are being booked into Q4 and beyond. We continued to engage with existing and new data center, HPC and AI customers for our 48-volt point of load power delivery solutions driven by rapidly escalating demand for high occurrence that will enable next-generation GPU and ASIC performance enhancements. We are also taking to the next stage our OEM licensing initiative to enable OEMs to develop alternate sources without risk of OEM systems using infringing power modules being excluded from importation into the United States. Our robust automotive pipeline continues to grow with new 48-volt and 400, 800 volts modular power solutions for OEMs. The automotive market is not only undergoing major shift with electrification of vehicles, but as OEMs look for innovative and cost effective solutions to higher power electrified system, they are also looking towards new suppliers who can deliver solutions and value without the traditional Tier 1 margin stack. These market shifts are opening up more opportunities for Vicor with new partners on our automotive business development. So very quick updates on the satellite market opportunity. In Q1, we started delivery of the Evaluation Board from our initial family of radiation tolerant power modules to customers in Europe and North America who have been eagerly awaiting their delivery. We will have more to say on this initiative in future quarters as we begin to build this business out. Overall, I am pleased with the progress we made in Q1 on a number of important initiatives with the level of exciting new customer engagements and new opportunities that we are creating. The power systems market is rapidly changing and our holistic high-density modular power components strategy has us in the right place at the right time. We plan to maximize the substantial opportunities that are ahead of us, while also asserting and monetizing the intellectual property that effectively progressed our pioneering innovations. Thank you. Operator, we will now take questions.

All right. So everyone, your question-and-answer session will now begin. [Operator Instructions] We have some upcoming questions. The first one is coming from Hamed Khorsand. Please go ahead.

Hi. So first off, could you just talk about the timing that you experienced in North American shipments in Advanced Products and the feedback you're getting from those customers as far as the decline that you experienced in Q1?

As we have commented in the prepared remarks, we've been constrained with respect to Advanced Products by the capacity within our existing factory and with [XL partners] for those process that are not vertically integrated yet. They've also been some component availability limitations due to the state of the semiconductor industry. Our customers understand the capacity constraints. We are working with them very closely. They appreciate the efforts to address their needs. We are catching up with the requirements we expect in Q2 to have a significant step-up in Advanced Products deliveries and that trend will continue into Q3 and Q4 at an accelerating pace. And as we progress towards the end of this year, we are going to begin to deploy the expanded capacity and reduce cycle time that are enabled by our expanded manufacturing facility with all the packaging process steps vertically integrated.

Okay. And then are you still testing out your Advanced Products with these customers? Or is this purely at the deployments level?

Well, it depends on which Advanced Product we are talking about. Some of these Advanced Products are being made and shipped by the millions. Other Advanced Products at the other end of the spectrum are still being sampled the initial prototype or pilot quantities. So these are wide range of volumes depending on when the engagement began with a particular cast and at what particular type of Advanced Products we are talking about, so with our very unique packaging technology with a very broad range of capabilities that apply somehow differently, but also in a related way across the power markets that are very unique for our component with [indiscernible]. So these are whole range of volumes involved depending on the customer, the application and when that particular product happened to be introduced.

Okay. Thank you.

You're welcome.

The next question is coming from Quinn Bolton. Please go ahead.

Hi, Patrizio and Phil. Congratulations on the nice results and outlook. Patrizio, I just wanted to follow-up on that last question. Obviously, you're highlighting some manufacturing capacity constraints as well as component availability constraints, and I'm just trying to reconcile that the comment that you had in the press release about revenue growth would be limited to 7% sequentially. Are you looking at – is that a comment on overall revenue will be up 7% quarterly for Q2, Q3 and Q4? Is that the way we should interpret the comment in the press release? And then within that growth, are you mostly constrained on Advanced Products or are you also constrained on Brick Products?

So the primary constraints are on Advanced Products and given near-term capacity, we see the revenue growth overall based on the ability to scale up the quantities of Advanced Products being limited to about 7% for this quarter and the quarter after that and the fourth quarter of this year. Again, once we get past this timeframe and we begin to deploy the additional capacity and the shorter cycle time of the expanded factory, it was vertically integrated processes. Those constraints will go away. And needs to say that the rate of bookings demand book-to-bill would have us absent the capacity constraints step-up revenues at a faster rate quarter-to-quarter. But in the short-term, the capacity constraints are the limiting factor and that's what's projected in the statements of the press release.

And I guess my follow-up on that is, will most of the growth come from Advanced Products over the next three quarters such that Advanced Products will grow faster than 7% sequentially, but overall revenue is constrained to 7%, so Brick Products perhaps more flattish with higher growth in Advanced Products with the net result is overall topline growing about 7% in Q2, Q3, and Q4?

Yes. Your interpretation is correct. As you know, Advanced Products are to timing, tens of years, they’re decades old, right. And as suggested in the prepared remarks, they are not – they're serving mature applications in relatively mature markets and there's no growth with the classic products. They are essentially a stable component of our revenues in dollar. So all of the unit growth and revenue growth is being generated by the Advanced Products, which before too long are going to make the classic bricks and the standard products for [indiscernible] purposes fade into the sunset, right. So the combined revenue growth is essentially driven by Advanced Products, which will set up other rate considerably faster than 7% this quarter, next quarter and the one after that.

Thank you, Patrizio. I will get back in the queue.

Operator, do we have another question?

Okay. As I can see there is a question in the queue, and able to speak is Alan Hicks. So your line is open. Please go ahead.

Yes. Good afternoon.

Good afternoon.

I had question about the brick revenues, if they were up 7%, like they were up 7.6%, which would put them around $54.5 million, I think, which would be about a 10-year high. And I think overall the book-to-bill last quarter was 0.9. So what explains that such strong strength in BBU? I know it implies – Advanced Products were only up around 3% or so, so what's the strength in the Brick Products and what's the – going through the year, would we expect that to stay at that level?

So again, the fact that from Q4 of last year to Q1 of this year, brick revenues rose, it should not be interpreted to suggest that that there is a substantial growth in Brick Products. The big component of our revenues, but for quarterly fluctuations, it may have to do with a variety of factors like capacity or particular demand. That component in dollars and units is essentially constant. It's not really going anywhere as suggested earlier. So in Q1 because of the constraints with certain semiconductor components and capacity constraints, the Advanced Products could not grow as fast as the demand would have allowed, which is something that is suggested earlier. We are focused on the fact that we are addressing in Q2, Q3 and Q4. So you should expect that in this quarter, following quarters this year, the revenue growth will come entirely to other Advanced Products.

Okay. So will Brick Products remain at this level rest of the year around $54.5 million?

Well, I wouldn't try to pin it down to three significant regions, right. So they're going to stay at essentially the same level.

Okay. So that's pretty positive for the brick customers that they're ordering. Okay, say it was about a 10-year high, I think for brick revenues.

Yes. But again, I wouldn’t read into that in any sustained growth in Brick Products. The action is all to do with the Advanced Products. The Brick Products have been remarkably long lasting, and they're continuing to be that way. They're not going anywhere, but they're not going up.

Okay. But you don't expect them to fall off.

No, we don't expect that to either fall off or go up. Again, Vicor going forward, this is going to be almost entirely about Advanced Products. So the brick will fade away in terms of the relevance to our financial performance.

Okay. But over time, do you expect them to stay relatively say in the $15 million range or?

Yes. We expect to be essentially constant in dollars, but a tiny percentage of our total revenues.

Yes. I think it's pretty positive that those products are continuing to sell out, so. Okay. Thank you. And I'll get back in the queue.

Thank you.

And the next question is coming from the line of John Dillon. Please go ahead.

Hi guys. Really congratulations on some great numbers, really good.

Thank you.

You're welcome. Phil, in your prepared remarks, you talked about OEM licensing for alternative sources. Can you expand on that a little bit? I didn't quite catch what your – the gist of what you’re saying in that.

Yes. I’ll let Patrizio to take that one.

Yes. So we have a strategy with respect to addressing OEM requirements for a multiplicity of sources that obviously respects our intellectual property, but accommodates the niche OEMs for the most scalable capacity and alternative sources. And this being the subject of the conversations and discussions and negotiations with a growing number of OEMs. We are seeing pressure in the marketplace given its guiding demands for current high-power density in a variety of applications in end markets. And that's a market pressure that in our mind, it needs to be addressed with a intelligent strategy that satisfies market needs, while providing us with an opportunity to get the return on investment both based on revenue growth with scaling quantities of Advanced Products and with licensing income to be derived from royalties that OEMs will pay for the privilege of being able to access alternative sources for certain of these products.

Can we – I mean, does this mean that you're close to a licensing deal with someone?

I'm not going to speculate with respect to the timing of any deal. We are having discussions. We are looking to establish a certain standards with respect to OEM license agreements that we're going to be able to apply consistently and fairly at each stage of an engagement, and there can be a progression with respect to stage. And generally speaking, our methodology rewards, early adopters and commercially puts late adopters to [indiscernible] with respect to their royalty rates. So this is a strategy that is very well structured, and which we are going to take the time necessary to fully implement.

It sounds good. Do you have like a target of hopefully closing a deal within this calendar year then? Or is there some kind of internal target for that?

We don't feel pressured. We believe that with the passage of time, the value of these licenses in terms of royalty rates is going up, it's not going down. Fundamentally, when it comes to applications like AI, we don't believe there is any way that there's no authentic technology that can address those solutions with the level of performance, the competitive pressures in that market requires. So we don't see the value of technology going down, we see it going up, and we're prepared to take the time necessary to make the most out of it.

Great. I'll get back in the queue. Congrats guys.

Thank you.

The next question is coming from [John Gruber]. Please go ahead.

Yes. The new addition to the Andover facility, when does revenue kick in and how much will that be, and when – how soon we will have all the machines moved in there? What's the status of that facility in addition to the Andover?

So the building is up. It's not quite fully enclosed, but it's about to be – some of the initial equipment is moving in next month and there's going to be a progression through the parts of the year. We're going to begin to get some initial capacity as we get towards the latter parts of the year. The entire deployment will not come together until the beginning of next year. In terms of the total capacity of the building, we believe that we can ship upwards of $750 million in yearly product revenues out of the expanded facility with this vertically integrated capabilities and that will take care of us for a while. We're beginning to look at the next increment of capacity. Referring back to the early discussions regarding OEMs and licensing deals, we're also entertaining the possibility of some joint venture to expand capacity in working cost with certain OEMs.

So the 7% you're seeing in addition – not in addition, the 7% increase in revenue in Q2, Q3, Q4 does not include this extra $250 million, that's more in 2022. Is that correct?

So yes, the 7% this quarter, next quarter, and the quarter after that, that's coming out of getting more capacity before we get to take advantage of the equipment that is being installed into the new facility. So as I mentioned earlier, some of the equipment is going in, in May and more equipment will go in as the months progress in the second half of the year. But obviously, this equipment, in addition to being installed needs to be qualified. We need to do some power grounds. So we're not going to be in fact turning on that additional capacity in earnest until the very end of the year, beginning of next year. So the increasing capacity that are being brought about this quarter, next quarter and for the most part, the quarter after that, those are you – you should think of them as being brought about based on improvements in capacity recession from equipment is accessible to us today.

Thank you.

The next question is coming from Richard Shannon. Please proceed.

Well, good afternoon, guys. Thanks for taking my questions as well. Maybe a quick question on following up on the topic of constraints here, you've talked about on the capacity side. I think you've also had some constraints in inputs here. I think you've described in the semiconductors. Are these commodity or custom products? And do they affect both the Advanced and Bricks or just the Advanced Products?

They affect primarily Advanced Products and they are semiconductor components in effect of our own making, but working with fab partners and other backend partners, part of plan going forward is to become also more vertically integrated with respect to in particular the backend, but that's not going to happen. [Indiscernible] is going to happen in a campus that will provide the next incremental capacity and that’s still is sometime away. But needless to say the semiconductor industry is becoming more challenge as you know in terms of demand for capacity. And we're mindful that and we're looking to become more vertically integrated with respect to those dependencies.

Okay. So your vertical integration is going to ease or eliminate these constraints on commodity parts, is that what you're saying? Excuse me, on the semiconductor?

Not in the near-term, but we do have a plan with respect to vertically integrating the backend processes, which are very much of bottleneck right now. So that's the primary constraint – it has been the primary constraint over the last several months.

Okay. And so is the timeframe by which that is relieved, is that coincidence and highly correlated with your capacity additions and then getting those online for what you just answered…

No. What I'm referencing in terms of vertical integrating backend is semiconductor packaging processes. That's the next opportunity for vertical integration beyond the packaging processes, which we're vertically integrating in the expanded [indiscernible] facility. So the next AI opportunity, which is in the works as we speak, and which will be realized by the end of this year, that has to do with the Vicor packaging technology, the converter housing package technology, which is quite unique, heavily applied for that. And the heart of the so-called golden products that you've seen in a variety of applications, that's the vertical integration, which is currently being implemented. And for which we've been relying on XL partner with significant constraints. The backend processes with respect to the semiconductor components that we use inside our package is that's in next day opportunity. And that's still, frankly, at least a year away.

Got it. Okay. Thanks for that detail, Patrizio. Just one follow-on question on your licensing. Does this related to both or just with the automotive segments, or do you also see this in data center and supercomputing and other segments too?

We see it in both of those end markets.

Okay. Perfect. Thank you much for the detail. That's all for me.

Thank you.

The next question is coming from [indiscernible]. Please go ahead.

Yes. Thank you very much for taking the question. I just wanted to see if I could get a little color as you bring on your new facility. Can you talk about at least quantitatively or qualitatively what the margin profile, how that will be affected? Will there be a hit in depreciation at first and then it'll expand? And any color there would be very helpful.

So even before we bring on the expanded facility with this vertical integration, our goal – our internal goal is to get to approximately 55% gross margin as a run rate gross margin at the end of this year and beyond that next year. The vertical integration of the expanded facility, they will play a role with respect to getting us beyond that 55%. Now to your implicit point, as we bring on the new facility, we're going to start depreciating a significant amount of equipment that we're going to be deploying. And that's obviously a factor with respect to the overall margin opportunity. But I think as we commented in the past, the total costs of performing all the process steps that are the heart of our packaging technology through XL partners were fundamentally are our panels, which are the equivalent of wafers in the semiconductor industry a type of fab. Our panels have to travel from [indiscernible] facility to someplace in New Hampshire to another place in Massachusetts. They put on hundreds of miles and they require weeks of cycle time, which are all going to get collapsed into a much shorter cycle time within facility, the panels that is the equivalent of waivers are already going to have to travel maybe from one floor to another. So the economies of scale, the efficiency, the reduction in cycle time, the improvement with respect to yields are going to weigh heavily with respect to the margin of opportunity. And that's going to start playing out in 2022.

Got it. That's very helpful. And then just in terms of the strengthened gross margin in Q1, there was a couple of factors, I think, higher utilization and mix is – could you talk a little bit about the factors, the puts and takes on gross margin and is there a delta between the gross margin of Advanced Products and Brick Products? Or are they similar? Or does it even vary within Brick and Advanced?

So to your point, the capacity recession by itself more revenues with respect to which particular mix makes up that revenue contributes because of the leverage of the model. We have significant costs associated with overhead. And as to say that there's overhead costs in dollars is not expanding nearly at the rate of the revenues, and that's a factor with respect to margin improvement. Getting through cycles of learning with respect to – in particular the Advanced Products, learning how to refine the process parameters and improve the yields is another factor. So we're getting better and better with that. Getting yields from the 80s into the 90s and needless to say it, those are points of margin that go to the bottom line will go into the gross margin of the products and help lift those margins. With larger quantities, we also can achieve reduced costs for the components, even though of late. That’s been impeded that progress by the current demand for capacity particularly in the semiconductor area where we've had to accommodate some cost challenges. But overall, all these factors contribute to the near-term margin improvement with revenue growth being a significant driver.

Got it. Thank you so much.

Thank you.

We have the next question from Quinn Bolton. Please go ahead.

Hey, guys. I wanted to ask, I think it was on the last call, you talked about your engagements with new and existing customers on their next-generation architectures. I'm wondering if you could comment whether those next-generation designs are still on track or have some of the component shortages and manufacturing capacity constraints affected the timelines of some of those next-gen products. And then I've got a follow-up on automotive.

This is Phil. Hi. So no, we are still very actively engaged on the next-gen GPU, ASIC and high-performance CPU projects with a number of the hyperscalers and chip manufacturers globally, actually not just in North America. So no that's been going really well. And we've got a next-generation product technology that really interested in because of the current density that we offer. And the currents are just continuing to go up. And actually this quarter, I'd say that, we've seen an uptick in the 48-volt interest from some of the companies that hyperscalers that have been lagging behind, if you like in converting data centers to 48-volts, we've got a couple of really great conversations going on right now. They're early, but I'm confident that they will turn into opportunities for Vicor. And it's really nice to see that 48-volt prediction of – I guess is finally coming to bear in the marketplace. So it's been an exciting quarter.

Great. And Phil, I wanted to follow-up, you’ve had made some comments on the automotive design pipeline, it seems like you continued to expand your engagement. Should we still be thinking about calendar 2023 is when you start to see some of the initial revenue ramp? I know you're probably shipping some sample revenue today. But in terms of the meaningful ramp that's still a calendar 2023 program, or could there be opportunities say, and things like charging stations that might even ramp before then?

Yes. The charging station or the charging opportunity for us is really on vehicle. I mean, that's what we're really focused on. So yes, you're right. It's really towards, I would say middle to end of 2023 in terms of the early ramps with some of the early customers that we have, and then picking up through 2024 and 2025. And the opportunities that the team is developing for the company are very exciting. And I mentioned in some of my remarks, the market is changing too. I mean, the electrification challenge has always been there and it's picking up, but the OEMs are really looking at the supply chains very hard and looking to the companies that can bring the next-generation technology to them, but at the right value and that's changing the supply chain too. So I think as we go through this year, we'll probably be announcing some engagements with partners that will help us bring the automotive opportunity I think even bigger than the one from just supplying modules.

Great. Thank you.

The next one is coming from Jon Tanwanteng. Please go ahead.

Hi guys. Nice quarter, and thank you for taking my question. I just wanted to address the new facility and how you've been limited or will be limited this year to that 7% sequentially. Do you immediately breakthrough that limitation as you get the new facility online in Q1? Or is there some other constraint that we should be thinking about that maybe you're not going to deal if you go past that?

No. With the trend on our capacity after completion of validation after the equipment is installed, the step-up in capacity from the new facility is going to be on the – scale major, right? We're talking about whether we measure it in number of panels or units, which obviously depends on the devices within a panel. It's a major step-up. Again, it gets us – maybe the best way to relate to it from the financial perspective is in aggregate revenue dollars. So we have $750 million booking with respect to that capacity that the [indiscernible] capacity with vertical integration. And I will say that number could be conservative. There could be opportunity to with all the equipment that’s going into the new wing to get maybe a little beyond the $750 million. So that obviously represents a lot of headroom relative to what we're going to be at the end of this year.

Okay, great. Thank you. And just want a little more color on the licensing discussion that you're having. Have they been received well? Or are they combative? Or are they constructive? Just trying to get an overall sense of the direction you think those discussions are going?

Well, I think that they are the way they should be under the circumstances, I think averaging across a number of discussions have taken place. I would say that OEMs recognized that we have a huge investment in very unique technology. It’s a decade old investment. That's up to well over $0.5 billion in R&D and measurable creativity. They understand that we have a very comprehensive par portfolio that covers many critical facets of advanced power systems, both in terms of the engines, the control system, the packaging technology, the power distribution architecture. And they appreciate the fact that logically, we would – they want to get a return on that investment that we would not allow competitors to step into our turf. But at the same time, we understand that that we have to use our intellectual property in intelligence considered and cooperative way with OEMs that logically want to be sure that they are going to have all their eggs in one basket, that they can have the incremental capacity they need to take care of their growth needs. Those are legitimate requirements. And I think there's a way to have win-win relationships that we see OEMs that satisfy all these objectives.

Okay, great. Thank you for that color. Just one more, if I could. Is there any risk of your customers delaying shipments because of supply constraints on their end, maybe a bottleneck might pop up and they won't want to take your product until they can get more into their factories that there might not be related to yours at all?

We don't see that. It's hard to say that the semiconductor capacity constrains aren’t impacting customers in a variety of ways. But as suggested in the prepared remarks, we are sold out for Q2, we are nearly sold out for Q3. We've had to impose some allocation with respect to the capacity that is available. So even if some customer, some application is otherwise constrained, there is few behind that customer that will gladly pick up any spare capacity that becomes lower.

Got it. That's good to hear. Thank you very much.

You’re welcome.

We have another question from Alan Hicks. Please go ahead.

Yes. Could you give us an update on the new front end products you've been working on?

A good deal of promise, so we have two leading applications for that. One, it adds to above the $15 million revenue opportunity starting later this year. And that's for LED lighting on a massive scale. The other one is in a supercomputer – Wafer Scale supercomputer application, and I would say from my perspective, it is the most advanced AI machine in our front-end – the new front-end, which is liquid cool. We enabled a major advance in capability for that customer and that application environment. So we're very excited about this. We have interest from some of the hyperscalers with respect to these kinds of liquid cool front-end to achieve unprecedented levels of density. Those engagements are not going to result in revenue near-term. The early implementations are state-of-the-art and very advanced not necessarily the most cost effective, but we’re looking at follow-on improvements that will enable these kinds of front-end to become extremely cost effective. And the technology is there for us to deliver those kinds of capabilities. So we still view these kinds of front-end modules, which are by the way manufactured with the same converter housing packaging technology, the same panel methodology, the same equipment that is going into the expanded facility. We see these front-end capabilities, which also have opportunities not just in stationary applications, but also in vehicle application. We see them as longer-term making up essentially half of the revenue opportunity. Another way of saying this is that while all the action maybe some times as being at the point-of-load, for every ampere or what the point-of-load that there's an additional stage of thought processing because the power comes ultimately from the AC utility that we can capture with very unique capabilities, that’s truly state-of-the-art.

Okay. So you have some initial revenue opportunities by say the fourth quarter, and then next year would begin to ramp more broadly.

Yes.

Okay. Thank you very much.

And with that, if there is one more brief question, we will take it or we wrap up. Operator?

I'm sorry, sir. You can take one more question.

Yes. If it is a brief one. Yes.

Okay. All right. And then it's coming from John Dillon. Please go ahead.

Hi guys. Thanks for taking this last question. You've talked about NRE funding from customers and how it really shows their commitment to Vicor. So I'm just wondering is that progressing. How is it progressing? And is there any pushback from the customers on that?

No, there's no pushback. I think it is progressing. And we look at it in effect as what you might call proof of love with respect to customers wanting to have us do something that is unique for them, right. It takes scans again to justify dedicating resources to get our requirement. Packaging technology in general, our system capability provide some high degree of flexibility with respect to addressing unique customer requirements within the general scalability of those technologies. But we need to be selective with respect to which particular projects we pursue because we have otherwise a lot more projects that we have bandwidth to support. NRE is an effective filter with respect to having customers demonstrate that these development worth taking up.

And you're seeing that increasing still.

Yes. With more customers, come more opportunities. And when those opportunities can be addressed with standard products, then NRE is appropriate. And one final comment with respect to this, it’s because of the fact that there's a good deal, more scalability with standard products because obviously those standard products can address in multiplicity of customer requirements, work with the more and more emphasis on those developments. So both at the point-of-load and with respect to front-end products, we're going to next-generation deployments with what we call our fifth generation, which is coming on late this year, early next year. With those developers, we're looking to leverage standard building blocks more than we might have in the past by capturing other requirements in a more comprehensive way.

That's great because that gives you more opportunities with less work.

That's right.

Great. All right, guys. Thank you so much.

Thank you. And we appreciate it.

And with that, we’ll wrap it up. We’ll talk to you in a few months. Thank you.

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