2023-10-24 23:50:05 ET
Vicor Corporation (VICR)
Q3 2023 Earnings Conference Call
October 24, 2023 17:00 ET
Company Participants
Jim Schmidt - Chief Financial Officer
Phil Davies - Vice President, Global Sales & Marketing
Patrizio Vinciarelli - Chief Executive Officer
Conference Call Participants
Jon Tanwanteng - CJS Securities
John Dillon - D&B Capital
Quinn Bolton - Needham & Company
Presentation
Operator
Hello, everyone. Today's webinar entitled Vicor Earning Results for the Third Quarter Ended September 30, 2023. My name is Jana [ph] and I am your producer [ph] for today. [Operator Instructions] I would like to advise all parties this conference is being recorded.
And now, I would like to hand it over to Joe Smith, Chief Financial Officer, please go ahead.
Jim Schmidt
Thank you. Good afternoon and welcome to Vicor Corporation’s earnings call for the third quarter ended September 30, 2023. I'm Jim Schmidt, Chief Financial Officer. And I'm in Hannover [ph] with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three and nine months ended September 30. This press release has been posted on the investor relations page of our website, www.vicorpower.com. We also filed a form 8k today related to the issuance of this press release. I reminded listeners this conference call is being recorded and is the copyright 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, our forward looking statements involving risk and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any 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 one a of our 2022 form 10k, which we filed with the SEC on February 28 2023. This document is available via the EDGAR system on the SE C's website.
Please note the information provided during this conference call is accurate only as of today, Tuesday October 24 2023. Vicor undertakes no obligation to update any statements or including forward looking statements made during this call. And you should not rely upon such statements after the conclusion of this call. A web webcast replay of today's call will be available shortly on the investor relations page of our website. I'll now turn to a review of our Q3 financial performance. After which Phil will review we'll review recent market developments and retreat to Phil and I will take your questions. In my remarks I will focus mostly on the sequential quarterly changes for P&I and balance sheet items, and refer you to our press release or our upcoming form 10 Q for additional information.
As stated in today's press release by core recruited were recorded total revenue for the third quarter of $107.8 million of 1% sequentially from the second quarter of 2023 total of $106.7 million, up 4.6% from the third quarter of 2022 total of $103.1 million. Advanced product revenue decreased 13.5% sequentially to $58.4 million, while product revenue increased 26% sequentially to $49.4 million. Shipments to stocking distributors increased 50.5% sequentially, and at 1.5% year-over-year. Exports for the third quarter decrease sequentially as a percentage of total revenue to approximately 62.8% from the prior quarters 68.1%. For Q3, advanced product share of total revenue decreased to 54.2% Compared to 63.2% for the second quarter of 2023. With brick product share correspondingly increasing to 45.8% of total revenue.
Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 51.8%, which is a 10 basis point increase from the prior quarter. I'll now turn to Q3 operating expenses. Total operating expense increased 7.7% sequentially from the second quarter of 2023 to $40.2 million. The sequential increase was primarily due to R&D spending and an increase in legal fees, which were remained at substantial levels through the completion of the investigation by the International Trade Commission of the unlawful importation into the United States of modules and systems than in French, the asserted Vicor patents. The amounts of total equity based compensation expense for Q3 included in cost of goods as G&A and R&D was 693,000 1,788,970 7000 respectively, totaling approximately 3.5 million.
For Q3, we recorded operating income of $15.7 million, representing an operating margin of 14.6%. Turning to income taxes, we've recorded a tax provision for Q3 of approximately $1 million, representing an effective tax rate for the quarter 5.9%. Net income for Q3 totaled $16.6 million GAAP diluted earnings per share with $0.37 based on a fully diluted share count of 45,187,000 shares. fully diluted EPS decreased approximately 3% sequentially compared to $0.38 in the second quarter of 2023 and increased approximately 825% from $0.04 per share earned in the same quarter a year ago.
Turning to our cash flow and balance sheet, cash and cash equivalents total $227.8 million at Q3. Accounts receivable that of reserves totaled $62.6 million at quarter end, with DSOs for trade receivables at 42 days, inventories and net of reserves decreased 1.9% sequentially to $104.6 million annualized inventory turns were 2.1. Operating cash flow total $23.8 million for the quarter. capital expenditures for Q3 Total $7.7 million. We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $26 million. And with approximately $16.7 million remaining to be spent on our address bookings and backlog to three booked to bill came in below one and one year backlog decreased 19.6% from the prior quarter, closing at $174.7 million turning to the fourth quarter of 2023. With reduction in backlog including overdue backlog, we are more dependent on turns orders and that results in less visibility to our near term outlook. While that is the case, our current expectation is that revenue gross margin and operating expenses will be approximately flat sequentially.
With that, Phil will provide an overview of recent market developments and then pretreat. To fill in, I 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 possible in the limited time available. If you have more than one topic to address, please get back in the queue.
Phil Davies
So thank you, Jim. Let's begin with an update on our high performance computing or HPC business which will continue to be our major growth driver in the next few years. For the next few quarters, we will be focusing in three key areas. The first will be ramping production of a Gen 448 volt bus converter, and factorise power point of load products in our new chip fab. The second will be completing development of our Gen 5 factorized PowerPoint of load solutions and delivering models and tools in Q1 of 2020. For the third, we'll be continuing to expand our customer base beyond the major accounts that dominated our revenues in the HPC market over the past five years.
Regarding revenues in HPC. We expect customers using both lateral and lateral vertical Gen for products to be in production through 2025 Before introducing new processes utilizing Gen 5 vertical power delivery of VPD solutions midway through 2025. In reference to the expansion of our customer base, we have continued to have substantial discussions with large data center, AI and NEC network processor companies on their challenges in powering next generation high current products. All of these companies recognize they need scalable access to more adept power system technology to effectively address the technical and operational challenges of generative AI at scale.
The one major technology challenge that is foremost in everyone's minds and heard repeatedly As power density and power delivery, power delivery to the processes, power delivery to the AI accelerator cards and their rack systems, and last but not least, power delivery to the data centers while driving towards a carbon neutral objective HPC customers are becoming aware that our Gen our current Gen 4 lateral vertical solutions can reduce power losses in an AI enabled data center by one to three megawatts while enabling high processor performance. Future processors will however require full vertical power delivery of VPD to continue power loss reduction cycles first generation VPD solutions introduced in 2020, required complex stack packaging to incorporate bypass capacitors in a gearbox layer due to insufficient current multiplayer density.
Putting their customers at risk competitors are going down the same road with even lower current density based on multi cell multi-phase solutions, running into greater mechanical and thermal challenges as they tried to deploy VPD using thick, heavy and thermally inept stack packages. Our Gen 5 MCM technologies steps up current density by over three times and reduces the multiplicity of bypass capacitors needed, eliminating a stack capacitive layer and enabling a second generation VPD solution to the power system requirements of the AI card that is thinner, more thermally adept, reliable, and cost effective. customer engagements for our Gen 5 VPD solutions are happening at an accelerating pace. And our objective in coming quarters will be to secure significant design wins. In view of the current density and performance gaps enabled by our 5G solutions and evolving AI power system demands.
I am confident that within a few years we will gain a dominant share of the AI power system market. One of the major objectives in the design and development of our 5G product line was to have a scalable, low cost short cycle time and vertically integrated chip fab with a short timeframe for capacity expansion. We will need this capability to meet the supply chain demands of our customers who are in two distinct groups at the moment based on different priorities. The first group where the priority is supply chain flexibility is focused on a multi-source, multi-phase VR technology. And the second group where the priority is competitive advantage from product performance is focused on the power system attributes needed to enable superior AI. Due to competitive market forces, our belief is that the first group will soon embrace the level of innovation and scalability enabled by 5G power system solutions from a multiplicity of chip fabs.
I am very pleased with our progress and other key markets, which are critical to developing a robust and flexible business portfolio of our own. We have reached a very important milestone in our automotive business development, achieving P pap qualification for three of our platform power modules for 800 volts to 48 volt power conversion, which enables production for these products in the second half of 2024. As in previous quarters, we continue to develop new collaborations with OEMs and tier one suppliers who value lightweight high density power system solutions. These collaborations will enable design wins for 2026 production and beyond. Towards the end of Q3 and early into Q4, we have seen demand strengthen in our broad industrial, aerospace and defense markets for both large OEMs and smaller customers who purchase through our channel partners.
Demand in China remains weak for both legacy brick and advanced products. And we have been shifting our focus in recent quarters towards the Korean and Asia Pacific markets, where we see new opportunities for our advanced power modules across a broad range of industries. Our new sales and marketing team in Japan has been making excellent progress, developing new pipelines of opportunity with large industrial automation accounts and are on track to add significant revenues in the coming years momentum With our operational excellence initiatives continues, with teams working on specific performance improvements with our top 100 customers. And with new product set to launch in Q4, and Q1 of 2024, we are on track to meet our Oh GSM goals. customer visits from our top 100 accounts to view or audit our new chip fab, have been averaging one per week in recent months. This pace will pick up in 2024.
As we ramp production, and have the ability to host more customers. Visitors have left impressed with our new fab, and its capacity and scalability. They understand their need to access our fab capacity for power systems with power density and performance attributes that cannot be supported by multi source multi-phase solutions that cannot keep up with our current density and PDN flexibility. They also understand our commitment to operational excellence, that's clearly reflected in the equipment, process and systems of our chip fab.
Thank you. And with that, we will now take your questions.
Jim Schmidt
Okay, operator, we're ready for questions now.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question is coming from Jon Tanwanteng. You're muted please go ahead.
Jon Tanwanteng
Thank you for taking my questions, guys. First one is just wondering how qualifications go on at the new facility. Can you talk about when you'll start shipping via through the vertical planning capacity and kind of the initial demand that you're seeing and the responses received from customers?
Patrizio Vinciarelli
I think we have trouble hearing part of your question. Could you repeat it, please?
Jon Tanwanteng
Sure. I was wondering how the qualification process went for the initial customers for the new vertical -- vertical -- vertically integrated plating capacity. And when you expect to start shipping volume on that new equipment.
Patrizio Vinciarelli
Okay. So as Phil pointed out in his prepared remarks, we've had a visit at an x ray the base frequent visits, weekly visits. As he mentioned, these visits have generally gone quite well. Visitors are impressed with the equipment, the processes, the systems we put in place to achieve much shorter cycle time. In scalable capacity, this is very evident to every visitor that has come through the fab. The Fab at this point, in terms of his vertical integration is what I would say essentially complete. That's not to say that all of the equipment has been delivered and installed. The savagery that the operations team has pursued in terms of enabling initial capacity has been to get the car equipment with respect to our two dimensional integrated packaging capabilities in place while deferring some of the other motion in order to facilitate some of the challenges by some of the vendors that automation is coming in, is getting sold over the next few months. But while we are in effect, not all of them were done. To a very large extent, we can at this point, make complete units including all of this emotional package integration steps that are essential to our fate for GE products in terms of vertically integrating processes that have been outsourced, as well as enabling our 5G platform from a body which has some very exciting new processes.
Jon Tanwanteng
Okay. To be clear, are you already shipping Are you still in the qualifications and maybe you know, finishing out phases, other facility, whatever you production -- are you producing out of that -- that piece that you've been working so hard to insource you know, over the last year or two?
Patrizio Vinciarelli
We are using it for wrong Some are in house needs. I will say most of our in house needs at this point. And beginning to selectively use it for certain customers, we're seeking short cycle time or avatar around to service their needs, but not on a mass scale yet.
Jon Tanwanteng
Got it? Okay. Just a follow on Patricia, when do you think the books or Bill will start to creep back over one, and you're used to your backlog increasing again?
Patrizio Vinciarelli
Well, that could happen relatively soon, it could take a longer, we're not going to make any specific prediction. I think it's a complex landscape. And there's a number of variables at play. So I think we need to be non-committal with respect to that.
Jon Tanwanteng
Okay, fair enough. I'll jump back in queue. Thank you. Thank you.
Operator
Next question is coming from John Dillon. You are unmuted, please go ahead.
John Dillon
So, I'm wondering if you can give us a little more color on the bookings, for example, as a bookings look, for the next couple of quarters, are we going to see sequential increases in the bookings, or do you expect them to be flat or down?
Patrizio Vinciarelli
We may see substantial increases. Again, we don't want to be very specific because of uncertainties that outside of our control. But if there is a range of scenarios that include pretty steep climb, but then again, it might take a while longer.
John Dillon
Just give us a little more color on that. What's going on, it sounds like you could possibly see a nice increase in bookings but -- and I understand bookings, trust me, I really do. But if you just give us one more color on that, that'd be helpful.
Phil Davies
So John says Phil, so Patricia said it's a complex landscape of, you know, older programs ramping down new programs coming up. There's a whole host of things out there complex wise in terms of the deployment of next generation solutions. So just bitrates, you said it's better to just take a little bit of a wait and see approach to that at the moment, given the set the complexities that we're looking at.
John Dillon
I guess I understand that this is a bunch of people are short on the stock and the shorts are running around saying no, you guys aren't going to see any bookings increase and you're out of the GPU business. Maybe you can just answer that question a little bit better, because they're pretty vocal about, about the demise of Viper, and they're really betting against you in the company. So I'm just wondering if you can help us out a little bit here. Give us a little color on, you know, what you see, as far as this concern?
Patrizio Vinciarelli
John, as you know, I think you've been an investor for long time; we don't run a company, based on what the shorts might do, or any near term, type of consideration, we take the long view, we're very committed, we believe we are in a very unique position, the only position that can support critical market needs. So that's how we run the conference. That's how we operate. We're not going to get into any debate regarding that, which to us is quite obvious. With respect to the tenure of our technology, the need for it is the cast of us that literally flocking to us in terms of their next generation AI needs. A confirm what we believe and subjectively supported by numbers such as current density, and PDN flexibility and vertical power delivery capabilities that are without equal in the industry. So that's what I think investors should be relying upon, obviously, their choice to believe us or not believers. We believe ourselves and time will tell with respect to that.
John Dillon
I completely understand. I was involved in programs where there was voltage drop and I understand that all too well. I don't know if all the investors but I completely understand.
Patrizio Vinciarelli
So, if something that's going to be too bad for them, but I think we need to move on to the next topic.
John Dillon
Thank you very much.
Operator
And the next question is coming from Quinn Bolton. You are unmuted, please go ahead.
Quinn Bolton
I guess first question. You know, last quarter, you guys seem pretty excited about this new AI platform that you expected to ramp in the fourth quarter of 2023 and throughout 2024. Can you just give us any updates on that program? How are you feeling about it? Is it still on track? We started to see more bookings associated for that. In a related question, there now two platforms on the market, one by NVIDIA one by AMD that I think both are rated at 1000 watt TDP. It seems like 1000 Watt is kind of the key power level where you guys bring some real advantages, especially with lateral vertical. Can you confirm whether this AI platform is indeed 1000? Watts, you?
Phil Davies
So, Quinn, this is Phil. So the first part of your question, I think it was what we talked about the last call. And my prepared remarks, I basically said that the first area of focus was to ramp in queue for our 48 volt bus converters and factorize Power Solutions. I hope that answers that question pretty clearly. The second in terms of power, we're seeing, you know, 1000 Watt, GPUs and network processes and all sorts of ASICs and mixes of CPU GPU combos out there. Nice big treat to talk about, you know, we have the technology to address those that offers, as I mentioned in my prepared remarks, as well, significant power savings with lateral vertical solutions of the scale of megawatts in data centers, which is really critical to any data center company. And we with our Gen 5 technology coming along, I mean, the level of engagement now is very, very high. As I said, we're having substantial conversations now with customers that will diversify us away from the two big guys that we've been doing business with for the next for the last few years. So as I said, I'm very confident in the future and where we stand. And it's a bit of a complex landscape, as I said, because you've got new programs, starting up old programs ending there's a bunch of other stuff going on out there with technology and product introduction. So, you know, as I say we're confident in our position in the market.
Quinn Bolton
Thank you, Phil for that question. And this is kind of highlighted in I think some of your legal proceedings, and ITC complaints against Delta. But it looks like one of your big motherboard customers has moved, it looks like in scale to a two stage you know, architecture and away from factorized power. And I think Delta has come in and won some of the sockets away from your MDM, I guess. Can you give us any sense of what's going on in the motherboard business? How is that business do you think goes to stage how much of it they single stage? Because it seems like you know a big customer has moved away from Vicor You know, with that transition to two stage architecture and Delta has come in to do the 12 or 48 to 12 volt module?
Patrizio Vinciarelli
So, as you may know, vagal pioneered the MBM bass converter, we have substantial IP, we've asserted three different pilots coming at it from three different directions and they're not the only parents we have the cover the technology, we have licensed it there OEMs that we're paying royalties for those and VMs and they're the ones that they have certainty or continuity of supply. The other ones they've been taking chances and those are going to go line down in the next year; that's what's going to happen.
Phil Davies
Quinn, I would say that when Gen 5 technology is introduced to the market next year. What have been -- you know, the CPU requirements have been creeping up, you know, 500 600 amps now for some of these motherboards, I think Gen 5 solutions will cause a number of customers to reevaluate that two stage approach, given the performance that they can get from our Gen 5. So I think, you know, the market has moved from two to a one to two, it'll go back to one in my opinion.
Patrizio Vinciarelli
Yes, I second that. So to be clear, in answer to your question, the NBN is not as much as we love when you look from the first. It's not a long term solution to three per square millimeter, high density VPD. scalable, robust, cost effective ETD for next generation AI, it is. Intense terms. It is essential is to drive, a multi-source multi-phase capability. That is fundamentally Africa. It's not really turning out to be when you get up to the kilowatt level or the 1000 AP level. Truly multisource is as brought about significant trade-offs in terms of performance which are not sustainable in a competitive landscape.
Quinn Bolton
Got it. Thank you.
Operator
[Operator Instructions] And the next question is coming from John Dillon. You are unmuted. Please go ahead.
John Dillon
Lateral and lateral as that was pretty [indiscernible].
Patrizio Vinciarelli
John, sorry to interrupt you. But it’s hard for me to hear what you’re saying. Phil?
Phil Davies
Yes. It’s coming across a little bit muted and mumbled, John. If you can do something with your speaker that would be great.
John Dillon
Is this a little bit better?
Phil Davies
Yes.
John Dillon
Okay. On the last call yeasted again a lateral in a lateral vertical opportunity with a major customer as one. It was the same TPU for was it for two separate GPUs?
Phil Davies
So what we talked about there was that we have lateral and lateral vertical solutions for not just one customer. But we are bringing that solution forward. And we have customers looking at that. Both of those solutions and certainly the number of customers looking at lateral deployments a little bit higher than the number of lateral vertical that we have found.
Patrizio Vinciarelli
Also the way in which systems have evolved. But make no mistake in the future -- and the future is coming next year, is no longer with lateral PDM. In fact, all of the design activities that were engaged in at this point is beyond the level of Monaco would be important potential customer tomorrow, we're not even going to consider a lot of either a lot of work, or what we call secondary an extra MVPD which is the most eligible, more robust form of EDD that falls on the yield on the VPD that Michael pioneered and other companies tried to copy.
John Dillon
So with the one major customer though they had two different designs with you one for working with the one customer they have to think GPUs that it can be used in one using lateral is going to be using lateral vertical or is it the same GPU that's initially then these lateral thing going the lateral vertical the job was not going to talk about any one customer I'm sorry, but bear with us. That's, that's not the level of specificity they want to get involved with. And then one last question widgets GMs gross margins at the factory?
Patrizio Vinciarelli
Well, I think we are on a general upward trend. That's not to say that we're going to see a positive improvements each and every quarter. But we have been in the low 50% range. And I think the three of us here feel Jim and myself have line of sight to a considerably higher numbers. Partly due to the unique fab capabilities that we put in place a considerable investment, but also significantly in terms of the 5G point of roll technology that takes us to a much stronger position in terms of not just performance or cost effectiveness in some of that is going to be passed along to customers in the form of more cost effective solutions. But at the same time those more cost effective solutions at lower price points in terms of sales to customer will result in substantially higher margins for vitals [ph].
John Dillon
Thank you very much.
Operator
The next question is coming from the attendee who joined over the phone. So please introduce yourself before you take your question.
Unidentified Analyst
Hi, Richard Shannon with Craig-Hallum [ph]. Can you guys hear me?
Patrizio Vinciarelli
Yes.
Unidentified Analyst
All right. Excellent. Let's hear a couple of questions. Maybe follow up on the topic of bookings here. I think last quarter, you felt fairly confident that the backlogs would improve either and the ending third quarter, fourth quarter now your teacher less certain of that. And I think if I understood one of the answers to a prior question, you're still expecting the design but the major customer to that is still active here. So seems like a couple of simple explanations for that would be either that design is delayed or your share of the size of the opportunity is more limited than what you initially had thought or potential. There's other reasons. So can you help us understand those dynamics relative to your last conference call?
Patrizio Vinciarelli
I think I'm a pretty we really don't want to go into the level of detail into it will appreciate the reason for the interest for curiosity. It's really get the mail to do with virus opportunity in the medium and long term and that's what we're really focused on.
Unidentified Analyst
Okay, I guess I'll jump to another question here. Maybe looking a little bit longer term. And, Phil, I'm going back to your prepared remarks here about timeframe for 5G technology to be ranting I think you said in 25 [ph]. If I caught my contrary commentary correctly, is this the expectation of one that would intersect with the first ramp of the three nanometer accelerators just seeing the market? What are some dynamic they're expecting to intersect with?
Phil Davies
No, I think 5G is I believe looking at the what it's capable of doing to the market is going to be very ubiquitous. I think we'll see. Design ends as we've talked about, even down in the you know, the low hundreds of amps because of the density and cost effective measuring performance level of the technology. So it's going to be ubiquitous across all sorts of different high performance computing markets. But with regards to what we see from a deployment perspective, 24 will be obviously a big design win here for us with an increasing number of customers and then a ramp to production in the 25 timeframe. Some customers early and 25. Other customers will have midway through the year. So there'll be a mix and a blend of both domestic and international customers actually so. So again, that's going to set the scene for us to take really significant share in the ever expanding AI market. That's what we're looking at right now. Richard.
Unidentified Analyst
Okay, thank you. I will jump back and get back in the queue. Thank you.
Operator
The next question is coming from [indiscernible]. Please go ahead.
Unidentified Analyst
There we go. I guess just a follow-up there to Richard’s question. If 2024 is sort of a transition year. Design year for Gen 5 and the real ramp of the Gen 5 technology. Would you expect no quarterly revenue to defer state at about current levels until you get to that Gen 5 ramp or DC the opportunity that is some of the gym for lateral and lateral vertical solutions. Done in the market, that you could actually see growth in quarterly revenue now not trying to get to give us a quarter when it may go on just how do you think about revenue over the next four or five quarters? Do we need Gen 5 to ramp before we see a significant increase in quarterly revenue or in that sooner with Jim for lateral [ph]? Thanks
Phil Davies
So quickly, so it's a complex landscape right now and we've got confidence in our Gen 5 again, for a lateral and lack of vertical solutions. We're going to see how that goes. But I believe that that technology is again, as we talked about, you mean you can't not save megawatts for your end customer and not consider it seriously for deployment, right. I just got back to that. So it's a very important step for us. Towards Gen 5. But we've got great products that we're going to be ramping this quarter and into next quarter. So we have a bridge if you like to the Gen 5.
Unidentified Analyst
Got it. Thank you, Phil.
Operator
The next question is coming from Jon Tanwanteng. Please go ahead, you’re unmuted.
Jon Tanwanteng
Thank you. I was wondering, Jim, if you could break out the actual legal expense in the quarter and kind of what would you expected run rate to be the IDC investigation over the next several quarters?
Jim Schmidt
Incrementally Jon, I won’t quote an exact number but it's in the millions of dollars and very substantial for us as a smaller company, but we believe it's well worth taking on because of the strength of our position.
Jon Tanwanteng
Got it. Do you expect it to increase from where you are what you did in in the past quarter year?
Patrizio Vinciarelli
No. But if we have to invest as much as necessary. Again, what we're looking at is the international poverty side of our business is profit. Right? The operating expense relating to a certain intellectual property is more than caused by intellectual property related income and we expect them to continue to move in the right direction. Occasionally, as it becomes evident to OEMs or in taking a wait and see attitude with respect to how this may all play out. That they're going to be left by competence that stone as they call it.
Jon Tanwanteng
So, I was wondering if you could expand us a little bit on the enthusiasm you're seeing out there for the for the genocide BPD we're what's like the breadth of the customer that you're seeing today versus where you were, you know, maybe in the same time and development cycle for the current gen of AI processes. Would you say that there's a lot more volume and opportunity out there today just because of all the I guess the amount of competitors that are out there, number one, number two beside the opportunity to just help me cry. You know what that obviously looks like Gen 4 versus Gen 5, if you can.
Jim Schmidt
Yeah, the current density improvement. Well first of all, you've got the drivers of the much higher currents coming along for all of the processes across networking. CPU, right, that's the first thing. Secondly, the markets expanding at an incredible rate, particularly on the AI side, but as you add more AI you also need to add more CPU. You also need to add more networking. So everything's sort of getting the big uplift. Now then you factor in that our Gen 5 is got three times the current density over the Gen 4 technology. And the reaction to that and we've shown a lot of the customers actually then you go down the list of the majors in data center AI processes or network processes we've, we've shown them examples of the mechanical examples of the packaging that we're going to have. The reaction is astounding. And they think they're astonished that we can put as much current as we can into that small of a package. If they're looking at BPD today, because that's where they're going to treat yourself. All of the conversations now we're about VPD it's not about lateral, their current Gen 4s, lateral vertical, but Gen 5 is all about vertical. They look at that and they say Oh, my God, I don't need to disturb my capacitive layer underneath my board.
I can put one of these tiny little current multipliers there. I don't have to worry about mechanicals, thermals, you know everything sort of fits. And so the reaction is incredible when compared to companies of similar Chinese companies that are trying to cut their copy though MBM trying to do this thing with VPD copying the basically the wrong thing, which is a stack of package; really heavy, really terrible -- you know, they're leading customers down the wrong path and the customers to see that when they see our Gen 5 technology. So the excitement is really incredible. And I'm very confident as I said we're going to take major share here in this market.
Patrizio Vinciarelli
Jon [indiscernible] is an hour show from manufacturability perspective in from an IP perspective as well. So there to ask foreign suppliers of clothing not just themselves, but major OEMs have substantial risk with respect to continuous supply it more in terms of you know the viability of the solution from a robustness perspective and from the perspective of liability from an IP perspective, or non-infringement perspective.
Jon Tanwanteng
Got it. Fair to say that the poll is much stronger on Gen 5 and it wasn't a Gen 4 or Gen 4.5?
Patrizio Vinciarelli
I think customers are going to get both performance, right. And the power savings can be talked about all the advantages of reliability of costs that add on to all of that. And with our scalable chip fab we're going to be able to work with customers on flexible Supply Chain Solutions. So we were sitting in a very good place, John.
Operator
Thank you. Next question is coming from the attendees who joined over the phone to use yourself before you have your question.
Unidentified Analyst
I'm Richard [ph] from Craig Allen again, guys, can you hear me? Okay, great. Thank you. Phil, I want to ask you about one of your statements in your prepared remarks here about 5G technology and kind of targeted to different groups with different priorities here. The last part of that statement was you believe the first group will embrace little innovation for 5G from a multiplicity of shift. Since you only have one that we said you talked about or any plan, can you participate in a little bit more and tell us what you mean by that and over what timeframe we could be a multiplicity and shift as well?
Patrizio Vinciarelli
To answer that question; again, given the lack of sharp visibility with respect to that, so bear with me, as I answer your question, in general terms, is you know, it took many years it makes substantial investment to bring together it first. In some respects, this initiative is senior to the kinds of fats most of us are familiar with some of our lack of fats. And as in that case, the technical complexity. The complexity from the perspective of equipment and processes is such that bringing to closure a, first of all, thanks, again considerable time of persistence, any investment, but the great news with respect to having done it, is that replicating it is our family and can be done on a much shorter cycle time with a high degree of stability and the investment involved. While substantial, it's in the hands of millions on indirect perspective from the perspective OEMs wishing to have flexibility from a software perspective given their system capabilities and value propositions is that perspective. Not even a small investment. So we do anticipate more than one fab coming to the market. To bring about the ecosystem where largely cannot, for good reason, rely on capacity from just the first bike or will amount of capacity from our facilities.
Unidentified Analyst
Okay. I guess, we'll parse that statement and ask about in the future Patrizio [ph], thanks for that and I'm going to follow up on one of your answers to a prior question, you're talking about, I think, probably not get your terms worded correct here but you only engage with customers that are interested in vertical only solution to the first or second gen here. Is that is that such a thing? Are you are you saying that you're not seeing anyone with a sufficient level of power and I'll use 1000 Answers maybe that demarcation lines helping separate that are not looking at you telling you they're not looking at lateral at all or you're just talking about the guys that are only looking at vertical?
Patrizio Vinciarelli
So they are typically looking up programs on different timescales, in some cases, a few months, or the Benefactor a year or a year with different kinds of requirements. You know, our process is to engage where we can contribute substantial value through impact particular 5G solutions with their unique set of attributes. And those configured differentiated when you get basolateral right, it can be we demonstrated that it will stick around here to allow high levels of roughly 1000 amps.
You can achieve something of the order of nearly 150 watts of a PDN or direct and those are pretty substantial and those when applied across data centers or can result in the mega scale failings of that that field reference area. So these are valuable position they're in that can be done with our 4G technology, even though the contents of that technology is a small fraction of convexity with 5G so it isn't that a lot of our figures, there's a value proposition there. And we can engage there to enable customers to achieve their objectives. But the much bigger opportunity is looking beyond the next few months or six, nine months. Our systems are going to go into production this feels like next year or early in 2025, we're with 5G MCM a fiasco square millimeter, they're all new world of Canada is enabled, in turn enable solutions around attributes right there. They're scalable, they're robust from a mechanical perspective, from a thermal management perspective, and are more cost effective.
Phil Davies
So Richard, this is Phil. Just to add on to that. A couple of weeks ago, I got invited to a big data center company's strategic supplier day where they had their executives presenting on future roadmaps and the challenges of building AI out into existing data centers as well as adding more data centers going forward. And as you can imagine, as potential mentioned here, we're talking about data centers of the 20 megawatt plus level and getting power into those while also trying to get carbon neutral is a massive challenge. So if you look at the amount of compute that's going to be needed to support AI going forward, forward, both on the CPU side and on the GPU or ASIC side, plus the network processing even if you shave 10 Watts, five watts. For the CPU. That's a massive savings. When you multiply the amount of compute in a data center it gets over megawatts very quickly. So even to save 10 watts or 5400 amp or 300 amp CPU, motherboard, and you can do it vertically. Why not do it vertically if you can offer that to your customer base. So that's the change that's going on in the market.
Patrizio Vinciarelli
To after that he started on the add to Phil’s on that question, why not do it therefore, if you couldn't do it, you need technology that has both the high cost and the high bandwidth that enables a significant fraction of the cap space very good if they're going to solve it. Would be swept away.
Phil Davies
Some power savings is going to be as this stuff gets deployed, because you can't follow it. You're competing also with all the EVs out there. The same grid supports all of that plus the data center. So they're also trying to use renewables but really significantly reducing the impact you know, on a megawatt scale is massive value add for any of these data science, hyperscalars you know, it's really important.
Jim Schmidt
Okay, operator. I think we're going to have to take maybe one or maybe one more question, please. And then, we're ought to wrap it up.
Operator
All right. So the last question is coming from Jon Tanwanteng. Please go ahead. Jon?
Jon Tanwanteng
I am sorry. I didn’t have my hand raised; that wasn't me.
Operator
Sorry. In that case, we have no more questions.
Patrizio Vinciarelli
Okay. Thank you.
Jim Schmidt
Thank you. everyone for joining the call.
Operator
Thank you, everyone. This marks the end of the webinar. Thank you for joining and have a nice day.
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Vicor Corporation (VICR) Q3 2023 Earnings Call Transcript