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Vicor Corp
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Good day everyone, and welcome to the Vicor Earnings Results for the First Quarter Ended March 31, 2020, Conference Call hosted by Chief Financial Officer, James Simms.
My name is Atila and I’m your Event Manager today. [Operator Instructions] I would like to advise all parties, this conference is being recorded for replay purposes.
And now, I’d like to hand over to James. Please proceed.
Thank you very much. Good afternoon and welcome to Vicor Corporation’s earnings call for the first quarter ended March 31, 2020. I’m Jamie Simms, Chief Financial Officer; and with me here in Andover is Patrizio Vinciarelli, Chief Executive Officer.
After the markets closed today, we issued a press release summarizing our financial results for the three months ended 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 that 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, planned capacity expansion as well as management’s expectations for sales growth, spending and profitability are all 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 prove in fact to be correct.
Actual results may differ materially from those explicitly set forth or implied by in any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2019 Form 10-K, which we filed with the SEC on February 28, 2020. Please note that the information provided during this conference call is accurate only as of today, Thursday, April 23, 2020. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call and you should not rely upon such statements after the conclusion of the call.
A replay of today’s call will be available beginning at midnight tonight through May 8, 2020. The replay dial-in number is 888-286-8010, again, that’s 286-8010 followed by the passcode 82686567. 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. I will start this afternoon’s discussion with a review of our Q1 financial performance. And after closing remarks by Patrizio, we will take your questions.
Beginning with consolidated results, as stated in today’s press release, Vicor recorded total revenue for the first quarter of $63.4 million, up slightly from the prior quarter’s $63.1 million. Brick product revenue declined 2.8% sequentially, while Advanced Products revenue rose 9.8% sequentially. Late in Q1, a small number of customers requested we postponed shipments due to the COVID-19 pandemic. However, the impact of those postponed shipments on first quarter revenue was immaterial.
For Q1, Brick Products represented 71.8% of total revenue, while Advanced Products share rose to 28.2%. Domestic volume rose to 52.9% of total revenue, revenue from shipments to stocking distributors domestically rose as well. Export revenue declined 4.8%, reflecting prior period bookings influenced by macro weakness across Asia, notably in China for our Brick Products. However, exports to Asia have Advanced Products to contract manufacturers building for our OEM customers rose slightly.
Consolidated gross margin as a percentage of revenue declined sequentially from Q4’s 47.1% to 43.1% for Q1. Production inefficiencies caused by delayed shipments of components from China and ramping volume of Advanced Products impacted gross margin. We also have incurred a noncash charge to increase the reserve against certain inventories of raw materials. High inbound tariffs continue to impact gross margin as we recorded $1.8 million of tariffs for Q1, up from $1.3 million for the prior quarter.
Regarding tariffs, U.S. customs remains backed up with high volumes of applicants for the duty drawback program. So, we have yet to recover any amount of tariffs paid to date. The total amount of Section 301 tariff paid since implementation exceeds $7.4 million and we anticipate nearly two thirds of this amount is eligible for drawback. During the height of the Chinese shutdown in February, we did, as mentioned, experience some delays in receipt of raw materials. By mid-March, however, all of our suppliers were operational in meeting their commitments to us.
I will now turn to Q1 operating expenses. Total OpEx rose just under 3%, with the increase entirely associated with a project-specific rise in prototype development spending. No other category of operating spend rose meaningfully. Full-time headcount stood at 991 at March 31, in line with the year-end total of 993. We recorded an operating loss for the quarter of $2.4 million, reflecting lower product level profitability.
Turning to income taxes. We recorded a small net benefit for Q1 of $494,000, after – although we are forecasting a full year of profitability. We have thoroughly reviewed the CARES Act for any possible provision, from which we might benefit. Because Vicor is too large to qualify for lending programs, and our financial performance and resources have not been materially affected by the pandemic to date. The primary CARES provision available to us is the temporary retention of the company’s portion of social security taxes payable in 2020, of course, representing 6.2% of payroll.
This will be a balance sheet item, not a P&L item as we will continue to expense such taxes through the year, but we will not be required to repay the full amount, which we estimate to be approximately $3 million until December 2022. Net loss attributable to Vicor for Q1 totaled $1.7 million. GAAP loss per share was $0.04 based on a share count of 40,635,000 shares.
Turning to our balance sheet. Cash and cash equivalents sequentially declined to $82.8 million due to the net loss and an unfavorable swing in working capital. Accounts receivable, net of reserves totaled $41.3 million at quarter end, with DSOs for trade receivables improving to 42 days. All balances are current. Inventories net of reserves rose 8.5% sequentially to $53.4 million as raw materials increase to support our near-term outlook for increasing production. Annualized turns correspondingly declined to 2.8. Capital expenditures for Q4 totaled $3 million as compared with Q4’s $3.4 million.
I’ll now turn to bookings and backlog. Q1 bookings totaled $70.1 million compared to $76.8 million booked in Q4 of 2019. At quarter end, backlog was $110.8 million, an increase of 6.4% sequentially. Advanced Product orders came in as expected. The sequential 9% decline reflects the composition of the prior quarter’s order book, which included a large year-long program for high-end commercial lighting. Absent that single large order, Advanced Product bookings rose 23% sequentially, and were almost entirely associated with customers in AI acceleration. Brick Product bookings declined slightly quarter-to-quarter with the uncertainties of COVID-19 across Asia, notably in China. So far in this quarter, bookings have been robust. But given the uncertainties associated with the COVID-19 pandemic, we cannot predict that this will continue.
Before I turn to our outlook for the second quarter of 2020, I will address the challenges we face with the pandemic, which has brought about widespread uncertainty as segments of the economy came to a halt. Since the declaration of the state of emergency in Massachusetts on March 23, our manufacturing operations have, however, continued to function without interruption. Vicor is an essential business under policies of the U.S. Department of Homeland Security given our role in supporting industrial sectors considered critical infrastructure.
In the second quarter, we have adapted to social distancing in the workplace and have provided work from home privileges to the extent feasible while maintaining productivity. We continue to operate three shifts at our Andover manufacturing facility and our engineering sales and administrative departments continue to function globally. We have taken substantial measures to protect the health and safety of our employees, and I refer listeners to our pending Form 10-Q filing, which will set forth the details regarding these measures. Although there is uncertainty related to the possibility that COVID-19 may influence future operational and financial results, we believe Vicor’s power system franchise, our strong balance sheet and our flexible operational model will enable us to emerge from the COVID-19 pandemic with relative strength.
Our expansion plans remain on track. We intend to begin to instruction of the planned 90,000 square feet addition to our Federal Street facilities in a few weeks. And as stated, expect to fund this construction and related investment in capital equipment from operating cash flow. Subject to unexpected disruptions from COVID-19, we anticipate increased revenue for the second quarter, which we are forecasting to be profitable. With that, I’ll turn the call over to Patrizio.
As Jamie stated, these are challenging times. However, Vicor is equipped to deal with these challenges effectively. I’m grateful to our employees and our suppliers for their efforts in support of our customers. As stated, we’re moving ahead with the addition of a new 90,000 square foot wing to our Andover manufacturing facilities. The new win will enable us to establish double the capacity for Advanced Products. And the new win will provide vertical integration for all of the process steps necessary to manufacture Advanced Products.
Vertical integration of our chip or converter housed in package processes is a major milestone. The combination of a large investment made over the last 15 years. Measured in R&D dollars, this investment is up to nearly $500 million. In terms of addressable market, this investment should strengthen our early leadership position in an emerging TAM we believe will be more than another greater than the aforementioned investment. And in terms of intellectual property, this investment is protected by a comprehensive patent portfolio, which, as I’ve characterized before, represents a minefield of patents, no competitor will be able to cross for a long time. This minefield spans a multivisit of proprietary technologies relating to power conversion engines, control systems and three-dimensional power packaging.
In combination, these proprietary technologies enable high-density power solutions, including power and package, and vertical power delivery, which are on the critical path of the rapidly escalating requirements of artificial intelligence processors. So despite the unsetting current circumstances, Vicor is positioned to emerge on the other side of the pandemic with a strong and well-protected leadership in the expanding market for 48-volt systems in AI, data center service and vehicle electrification. Recognition of this leadership and of the technology gap separating us from any inspiring competitor motivates every power engineer and project manager facing high-density power system challenges to approach Vicor for our unique performance-enabling solutions.
We offer listeners or best wishes for the health and well-being as well as their families, friends and colleagues. We will now take your questions. Operator?
[Operator Instructions] And we already have three questions in queue. And the first one is coming from the line of Quinn Bolton [Needham & Company, LLC].
Hey, guys. Congratulations on the nice activity in the Advanced Products side. I guess I wanted to start there in the press release, you talked about the pace of activity in early second quarter, reflecting strengthening demand for Advanced Products. Can you give us a better sense? Is that sort of across the board? Is that more for the hyperscale server motherboard business that you’ve been involved in for a while? Is it more for GPU or AI accelerators? How broad-based is that demand for Advanced Products?
It’s relatively broad-based. So it includes the early portion of a ramp for a new GPU, hyperscale servers. But it also encompasses strong activity for even our bricks or old all bricks, in industrial markets, medical equipment. So it’s surprisingly broad. Frankly, I would not have thought that a few weeks ago. I’ve asked a number of questions relating to what’s behind it. And in a nutshell, it derives from the programs that I outlined a moment ago.
And Patrizio, just want to follow-up, especially on the Bricks business. Is there any way to determine whether or not your customers are trying to buy ahead or build inventory, buffer inventory, given the increasingly uncertain environment – demand environment, as I think nobody really knows what the second half of the year is looking like? Or do you have pretty good confidence that this is in demand and real demand for those products?
So, I asked that same question of a couple of people here. And the answer I received and what I read in the daily bookings is evidence of programs that are going into production and generally sustained demand. Now without question, to your point, and in fact, my own question with our sales folks. There could be some component of customers trying to ensure that they have a continued pipeline of products through uncertain times. But we haven’t been able to add up that component to anything significant.
And as a complement to that, Quinn, we’re not susceptible to the double booking patterns that you sometimes see in commodity businesses.
Because most of those solutions are customized, correct?
To some extent, yes.
Yes. And just two quick ones for you, Jamie. One, just wondering, obviously, the gross margin was hit by some of the supply chain inefficiencies in the first quarter. How do you think gross margin looks in the second quarter? And similarly, on OpEx, you mentioned development and prototype expense was higher in the first quarter. Does that continue at an elevated level in Q2? Or does it step back down to levels that we might have seen in 2019?
Patrizio, that’s your department, so…
Okay. Well, I’ll try to answer your question first. I think in Q1 with some rather unique set of circumstances. I think looking at Q2, the margins look better. We are ramping new products. So that’s not necessarily going to immediately bring about the level of efficiency we like. So to mitigate expectations, I think we may need to wait until we progress further along in the year to achieve greater efficiencies with those new product ramps. But as a team, we’re very much focused on growing our margins. We see ways of accomplishing that. And certainly, it is a long-term proposition, not one that it leads to immediate gratification. But given the proprietorship in the products, the unique franchise we have, the economies of scale, we’re about to achieve the vertical integration that is going to be brought about with the expansion of the factory. We have a plan to get there.
And any quick comments on prototype expense into the second quarter? Does that continue? Or does it step back down?
Yes. So, there’s a lot of activities going on in support of a variety of customers’ requirements. These are very intense developments requiring quite a bit of prototype activity that, again, is a costly proposition, but one that sets the stage for long-term opportunity in terms of those programs. In general, our strategy going forward, given a new product line of devices that can be used both for lateral and vertical power delivery. And they represent a standard product offering. Our general strategy going forward will be to leverage to the extent possible with most applications and most customers those standard products in order to provide a combination of benefits, including shorter cycle time, faster time to market. And to your point, most significantly, minimization of ADOC developments that are intense and costly. And also that are not inherently scalable as we would like our capabilities to be. There are just so many of these major projects that can be handled at any one point in time.
So, mindful of that, we put a lot of effort in a profitability using our 4G technology and scaling up so-called golden cells to provide the level of modularity, granularity that should enable us for most applications to provide the solution-based on standard building blocks that are available of Vicor off the shelves. This we’re going to be rolling out as the year progresses. It’s a very extensive product line. And again, it will provide customers with benefits in terms of immediacy, in their power system solution, flexibility. If their power requirements change as they often do, while lessening the burden on like R&D, to customize or heavily customized solutions that are tailored to particular needs. But there’s still going to be some of those. There’s no question about it. We’re – a program warrants it because the program is in the tens of millions of dollars of revenues per year. We will still entertain it at lower revenue levels, we can’t justify it. The standard – the methodology is, generally speaking, going to be good enough.
Understood. Thank you for that detail, Patrizio. Thank you, Jamie.
You’re welcome.
The next question is coming from the line of Jon Tanwanteng [CJS Securities Inc.].
Good afternoon, guys. Thank you for taking my questions. My first one is we’ve seen reports from some heads of some large hyperscale companies that they’re talking about or thinking about reducing their data center spending. I’m wondering if you’ve already seen that in your Advanced Products orders. Or is that still yet to come? Or is it maybe being offset by these new customers and applications that you’re now rolling out? Any color there would be helpful.
So, with respect to the visibility we have, I don’t see that. We don’t see that. Again, we are at the beginning of a couple of major programs with major customers. And the number of other somewhat smaller programs, those may not be affected by any tiring of the belt that may be going on, depending on how the Domino’s of coronavirus end up falling. But I would say that thus far, I’ve been surprised by the resiliency of the demand well above where I thought we would be at this point in the second quarter in terms of bookings. And an offering to Jamie’s point, that’s not going to be negated by a weakening of the demand later on. We don’t see that. It could happen, but we don’t see it.
Yes. I would just highlight Alibaba’s statements about the magnitude of their intended spend, we’re not seeing any contraction in terms of our opportunities.
Understood, thank you. And Patrizio, you mentioned you were surprised by the strength in the orders. Was that broad based? Or was it just one or two bigger customers that came in earlier or stronger than you expected? Can you just help us think about what would actually went on at a little deeper level as possible?
Suggesting the earlier answer, it’s been two major programs that are beginning to ramp with demand, where the forecast has been revised up. We’ll have to see that that holds. We would have been around long enough to be surprised. But certainly, the indications are positive. But also general demand for not just Advanced Products, but also good old bricks. So, I think it’s, generally speaking, relatively broad-based.
Great, thank you. Jamie, just one for you and piggybacking a bit on what Quinn just asked. Can you quantify the gross margin hit from the supply side in the last quarter and also the prototyping costs that was, I guess, above your normal run rate? And I assume that, that latter bit is going to keep…
I can, but I won’t. Let’s just characterize it as something that we hope is behind us.
Okay, fair enough. And then just a general question, are there any issues with your partners? Whether is your suppliers or customers in terms of solvency or liquidity or maybe some of them might have been shut down by quarantine or state issues or maybe even contracting viruses in their facilities. Just wondering if there’s any risk there? And then how could we capture that? Or how are you planning for that?
So, we’ve had one partner experience, a reduction in the workforce due to coronavirus that is appreciable significant, I should say. We’re working around. So certainly, from directional perspective, this, as I said earlier, challenging times, right? It’s not easy sailing. But as suggested in the prepared remarks, we are seeing very strong support from all our key suppliers and partners. There isn’t anything that represents at this point in time, a stumbling block. Again, operations has had to work some issues, but they found solutions for those challenges. And I think the magic is going to be to keep on making it happen this quarter and the next quarter progresses.
Got it. Thank you very much. Good luck and hopefully, the strength continues.
Thank you.
Yes. Thank you.
The next question is coming from the line of Don McKenna [DB McKenna & Co., Inc.].
Hi, guys. I wanted to go back, if I could, to the bookings a bit. And I know in the beginning of the month, you increased lead times from 20 to 24 weeks, which in and of itself, would seem like would generate about a 20% increase in bookings for the upcoming quarter. If you backed out any increased demand that you see that would be generated by that increase in lead time, what would you see as a percentage increase for end demand for the quarter?
So, generally speaking, as we all know, bookings within a quarter tend to be acoustic, right? They – it’s another linear progression as we would all love to see it and what I generally expect as the quarter progresses is that the plan is achieved with a strong contribution in the second month and particularly in the third month. So case in point, last quarter, we had a very strong finish to the quarter. And that made the quarter from a bookings perspective. This quarter, thus far, were actually percentage-wise, appreciably ahead of the linear fill for the plan – for the bookings plan for the quarter as a whole. Lead times, to your point, do play a role. But I think the strength we’ve seen in terms of the actual programs, it points to sustained demand. We’ve had examples such as providing bricks for ventilators, as an example, or other kinds of solutions that are unrelated to lead times. And – but anytime, to your point, is a question of be a component.
Now, with our own suppliers, we’ve seen increased lead times, particularly in the power semiconductors area, lead times went up. And the combination of component lead times with respect to some key components going out and the need to plan factory capacity with greater visibility, more runway particularly navigating through some component supply issues that, again, we’ve been able to address, but could recur. That’s what led us to take the step of extending lead times by four weeks.
Yes. But if you backed out the increased demand because of – or the increased bookings because of your increased lead time? Can you give us a feel for what kind of a percentage increase you anticipate in the way of bookings for the quarter?
So, at a general level, I would say that in a typical quarter, this far into the quarter were essentially two thirds into the first month of the quarter. I would expect on a linear basis in terms of linear fill to be at a percentage below the – if you will, 100% level, if things were perfectly linear by typically 15%, 20%, 25%. Instead, we’re ahead of the quarterly plan on a linear basis, by a percentage, I’m not going to tell you. So I think that differential is substantial enough to fit with what we see in terms of the specifics of the orders that we’re getting. Again, when we go back to the earlier question of the composition of the bookings. And the fact that when it comes to so-called strategic customers, these bookings relate to new programs that just need to ramp those programs, as they ramp, should lead to an increased rate of bookings as we get further into the second quarter, into the third quarter.
Okay. But my other question is kind of related to that. And that was – what is the current percentage of capacity for the Advanced Products that you have?
So, we are doing okay in that regard. We have the capacity we need. We always like to have spare capacity to be able to deal with burst demand.
But are we running at 50% of capacity or 60%? Or…
I don’t have a specific accurate number to give you. We’re not running at 100%. We’re not running at 50% and we’re running somewhere in between. Capacity, to be clear, is some modelistic is dependent on, in effect, what levers we pull in order to adjust it. So we’re comfortable with respect to not having a capacity problem over the next few quarters. But we’re also mindful of the fact that we’re going to need more capacity. And that’s why in spite of the challenging times and the uncertainties of the times, we’ve decided without any hesitation that we wanted that needed to move ahead, break ground and get an expansion to our Advanced Products capabilities. With the goal of actually moving equipment into the facility, if not at the end of this year at the very beginning of Q1 of 2021.
Thank you.
The next question is coming from the line of John Dillon [D&B Capital]. Please proceed.
Hi, guys. Hey, is that backlog number a record?
I’m not sure, but it’s close to 40.
40, right.
Yes.
It might be.
I think it is from whatever. Anyway, congratulations. That’s really good to see. It’s obviously you guys are doing well on the COVID new environment. So, I had a question. It looked like your shares of stock went down. I was just kind of curious as to what happened there? Why did they go down?
Well, you can answer the question for me. I’m not sure I’m going to venture a guess with respect to that other than, obviously, to a significant degree.
But remember, we’re working off of a loss position for the quarter. So, we use what used to be called basic shares as opposed to fully diluted.
Okay. So, had some options become dated? Or did you buy back any shares or anything like that?
No, it’s just that we do it on outstanding shares. The basic share count, which is the $40.6 million.
Yes. It just seems like it went down. So I was just kind of curious as why it would go down.
Actually, the basic went up from $40.482 million to $40.635 million.
And diluted went down?
Yes. But again, it’s based on options that are…
That can related to the stock price.
Yes.
Yes. So, lower stock price.
Okay. As you’re just saying, okay.
They’re exercisable in the immediate future and based on stock price.
Got you. Okay, thank you. Thank you. Patrizio, I was wondering if you could comment a little bit about GCM engagements. Are there any new engagements on how is that going? Are you picking up some new significant customers in that?
Yes. So, there’s a lot of activity on that front. As I suggested earlier, we are actually trying to limit the number of engagements for GCMs, and this is an even more complex, if you will, triple stack, where we engaged thus far with two major customers, key customers. But going forward, while we get requests literally every day for solutions that involve GCMs. We limit to the extent, possible going down that path because, as suggested earlier, there’s a level of complexity to it that gets in the way of scalability. So, it is something that we’re only going to entertain for major programs in the tens of millions of dollars per year. And again, solutions where customers would like us to address through a custom GCM. They can be made to happen with still state-of-the-art power density, efficiency and general performance without involving the custom development into GCM. And to be a little clear in terms of the audience here. Why – as to why it is that GCM has got a high level of custom tailoring? With the GCM, we have A-Cam multiplier that is sized to deliver the current requirement of a processor be it 700 amps or 900 amps or 1,000 amps in that general ballpark. And we have the multiplier layered on top of what we call a gearbox, which is one of the many positive aspects of our technology that adapt the current multiplier or adapt any kind of modular power system, such as a current multiplier. To the pin map of the SoC ASIC that is being powered. In other words, the customer comes to us with not just a current requirement and a power requirement. But also, if you will, the pin map of its ASIC, which has got a lot of detail to it as you can imagine. And it’s that detail that drives customization, because the solution is tailored to the application.
Now, we learned having gone through this exercise a few times how to make it more scalable, and we’re getting more proficient at it. To the point, where as I mentioned earlier, we’ve taken on two major opportunities with so-called triple stacks, where there is a gearbox, there’s a car multiplier. And there is – the rest of the power system is layered on top of the current multipliers. So, you can have a complete vertical power delivery solution. But what we’ve gotten better doing this complex custom developments and they’ve been useful in terms of exploring what could be done, and what the technological opportunities and intellectual property opportunities would be. It is not something that we weren’t encouraged for broad-based general purpose type of applications.
Thank you. That was a great explanation. Thank you. So that kind of dovetails into my next question, which I think you’ve answered in previous questions here, but I want to make sure I’m clear. So, you mentioned that you had specific customers that drove your expenses up. And it looked like your R&D was up about $2 million and your SG&A was up about $1 million and are those in customer engagements with GCMs? Or were they also involved in projects that were like for $20 million or more a year, like you mentioned a couple of times?
Yes. Generally speaking, there’s a threshold, it’s not necessarily always the same to justify this kind of development. In the case of companies that have significant potential, we may entertain it if the opportunity warrants it. In other cases, there are established companies in their respective areas, where that opportunity is very clear for us to see. So, obviously, judgment enters in to it. And in some cases, this amount of risk with respect to seeing the return on investment, but generally speaking, we’d like to limit that.
So, just to quantify for you the level of activity that is going on [indiscernible]. Just within the last month, month and a half, several of these engagements were progressing through R&D engineering with a variety of activities that in effect, represent significant expense, both with materials and R&D personnel, and they were all concurrent developments and if that’s at the root of the R&D costs being what they are.
All right, thank you very much. I’ll get back in the queue at this time. Thank you.
Thank you.
The next question is coming from the line of Richard Shannon [Craig-Hallum Capital Group]. Your line is now open. Please proceed.
Well, hi Patrizio and Jamie. Thanks for taking my questions. So, let me start with the financial one on gross margins. It sounded like from your prior discussions that you were looking for gross margins improving here to some degree in the second quarter. But Patrizio, based on your comments, it sounded like it would take a couple of quarters, maybe to get back up to prior levels of 2019 based on the ramp of some new products. Is there a kind of a history that you can fall back on and give us a sense of how fast it would take before you can get back – you get your gross margins back up to the mid-to-high 40s?
Well, so I think a very reasonable threshold given the level of investment in the technology, the proprietorship, the IP is 50%, right? So, as management team, we have set our sides on crossing the 50% level in a matter of a few quarters. And then going well beyond that as justified by the $0.5 billion investment that I was referencing earlier in the technology portfolio that we’ve been developing over the last 15 years. A fair return for this kind of the technology is not based on gross margins in the 40s or even in the 50s. We need to be thinking of gross margins in the 60% and maybe, even higher than that.
And obviously, part of this is cost structure. The cost structure is key to making customers very happy with respect to not only having solutions that enable their competitive advantages, but also being able to do so very cost effectively. But also, they, importantly, enable us to achieve good margins, improving margins as we need to do to get return on investment.
So going forward, with the expansion of our fleet with the vertical integration, of the balance of processes required for power package, vertical power delivery and economies of scale associated with greater volume. Given the fixed cost structure that we currently have in Advanced Products, we have tremendous opportunities to dramatically reduce cost. And that’s the number that we are very focused on reduction in cost and we measure this in terms of so-called panel costs.
So, as you might know, alike the bricks of decades ago – conceived decades ago, which are made in effect, one at a time, chips are made out of panels. You can think of them as brownies, if you will, in an analogy. And the factory is designed to, in effect, make brownies. And we make brownies of different thicknesses. But the X and Y wide dimension of the browning is always the same. Just like in a wafer foundry, they said the SMC or some other major foundry. Costs are based on common denominator wafers for certain classes of products.
In our case, we have a similar metric that, in effect, enables us to achieve economies of scale based on the number of panels we manufacture and as we drive the power count up, the cost structure per panel goes down. And fundamentally, what a chip cost is a function of two things: what the panel costs and how many chips we get per panel. And the number of chips we get per panel keeps getting reduced as we continue to increase the power density of the products and in maybe assuring – increasing the power density, we, in effect, reduce the area of the panel that is occupied by a product of a different power capability or certain power capability.
So, these are the key drivers to continuous cost reduction, dramatic cost reduction, getting power costs down, while at the same time, getting the number of chips per panel at a certain power level per chip up and there is tremendous opportunity with respect to reducing costs.
Wonderful. Patrizio, thank you for the complete and helpful answer there. Maybe, one or two more from me and I’ll jump on the line. You’ve referenced, I think in the last conference call about the OEMs, the OCP accelerator modules. Maybe, if you can characterize how important of an opportunity to see that for this year, maybe next, and I think specifically last quarter you referenced, one of the versions using your LPD. To what degree, do you see that as a contributor to revenues this year?
Well, so that’s a space where there’s obviously a very large established dominant player and lots of aspiring competitors. Again, what I can say is that wherever the current requirements get beyond a few hundred apps, particularly as they get up to 700,000, 800,000 apps and beyond. Our solution is very highly differentiated and fundamentally enabling, where competitive alternatives are not. And again, comparative alternatives, cap in a number of respects, their basic proficiency and potentially IP constraints.
So, we feel very strongly that as that market continues to expand as it has with a number of competitors gunning for a market opportunity that is due to grow very substantially over the next five, 10 years. We see ourselves as being a common denominator power system enabler for those solutions.
Okay. Fair enough. Last question from me. Last quarter, you talked about in the auto switch to the signing of two agreements. I didn’t hear anything in your prepared remarks today. Any updates you can give on progress there? I know that we’ve seen a lot of the automotive space slowdown that have those slowdowns impacted any sort of engagement or discussions in that space?
So, just to say, over the last couple of months, things have been relatively quiet in that general area. People can’t travel, can’t visit automotive customers, potential other customers in that general space. So, I think we’re going to have to wait a lower while to see what transpires after the impact that recent events have had on that market. I would expect that justification trend and that the convergence on 48-volt node as a central node within electrified vehicles, will before too long accelerate even further in spite of the cost of all coming down, because of other secular trends that I believe are going to be driving these advances.
And certainly, the leaders in that area are continuing to drive hard for solutions, AI solutions for autonomous driving and other kinds of solutions for power systems beyond autonomous driving in electrified cars. But frankly, over the last several weeks, I haven’t been personally followed so that much on the automotive space for obvious reasons and having gathered recent updates on activity on the general front.
Okay. That makes sense. Thanks for the detail. And that’s all the questions from me. Thank you.
Thank you.
The next question is coming from the line of Alan Hicks [Ainsley Capital Management]. Please proceed.
Yes. Good afternoon. I had a question about, it seems like with everything that’s happening that data center service demand is increasing. What are you seeing from your customers turning, getting stronger?
So, as suggested earlier, the customers and the programs that we’re particularly focused on, appear to be doing well. And I’m fair that their motivation to accelerate ramps and get new products that create new revenue opportunities to create new levels of efficiency in data centers. Those are driving these ramps. I can’t tell you whether with other programs and potentially, other customers, the same general trend holds. I don’t know for a fact, one way or the other. But with the visibility that we have, thus far, it’s been remarkably strong.
And how are things going with getting new customers?
It’s going very well. So again, when it comes to AI, any company you would think of is either an existing engagement or an engagement waiting to be kicked off.
And is – how do you see 48-volt adoption? Is that – is it interest increasing? Or how is that going?
It’s definitely, at this point, a down deed in the sense that the train has left the session. Not everybody is gathering on it, but it’s clear, where it’s going. So take artificial intelligence as an example. In that particular case, what drove the switch from 12-volt to 48-volt was the realization that a 48-volt was a necessary intermediate node to be able to support the level of GPU car that the solution demanded. It is, in that particular case, the current requirement of the GPU that drives the switch from 12-volt to 48-volt. Even though, as we all know, where a lot of these GPUs are currently deployed, which is in data centers, the infrastructure in data centers is still largely 12-volt. This is a notable exception and there are more exceptions that are going to become the norm before too long coming away. But clearly, the Ruby Garner has been crossed with respect to 12-volt going to 48-volt.
In automotive, the same all through. I think you only need to look at the number of conferences that were held before the pandemic in Germany, in China with the title 48-volt Power Systems for Automotive. But they were happening with the frequency of one every couple of weeks to get a measure of that trend. And again, there may be selling few automobiles now, but I think the rationale for going green, if anything, I think, is made stronger by recent developments. So, we see that trend accelerating after this advanced settles and I think the need for taking advantage of advanced technologies will become even more compelling in order to have a competitive advantage in that space.
Okay. And then on your front-end products that you hit that RFM product based on 4G technology, how’s that going?
That’s going good. So, we are engaged with a customer that will be a lead customer for that product. This is NII customer, where in effect, we are already providing the point-of-load of solution as a Power-on-Package solution. They still have a very bulky classical front end. They’re going to be able to shrink the size of that front end, essentially, by an order of magnitude using 4G RFM technology. So that’s going to be a lead customer for us in that space and we look to broaden it from that. So, we’re very focused at this point on this initial engagement.
So, you still have very high hopes with that product?
I’m sorry. Oh, yes, yes.
You still have high hopes, yes.
Yes. We do.
And then lastly, can you give a quick update on your supercomputer business?
There are programs ramping in that space as well. There’s some government programs, other programs. So that’s one of the examples, I had in the back of mind in answer to the earlier question with respect to where the strength in the near-term is coming from supercomputers is one of those areas that have programs, deadlines and production requirements are coming.
Okay. So, you expect sales from that in the second or third quarter?
Yes.
Okay. Thank you very much.
Thank you. I think if there is one more question, we are at the end of the hour.
Yes. We do have one more question. Can I introduce it?
Sure.
Okay. Thank you. It’s coming from Jim Bartlett [Bartlett Investors]. Please proceed.
Many of my questions have been asked. Just last on the RFM product. You had said last conference call in six, seven weeks, you’d have the 4G controller chip and you start powering it up. Has that happened?
So, we’ve had a first revision of the 4G controller that we used for some initial purposes, essentially, benchmarking. Not surprisingly, the silicon generally requires a re-spin to address some minor issues that are found in benchmarking the Rev A. So, we have a Rev B, which is due in, I believe, a few weeks, I think it’s about three, four weeks from now. We expect that to be good to go in terms of scaling up our capabilities with respect to 4G PFC, both single phase, three phase, RFM, a variety of products for AC to DC power conversion – front-end conversion.
And, and when you see bookings, well design wins, the production bookings, what sort of that cycle that you might see...
Yes. So, I will look at 4G RFMs as being a near-term contributor that is going to move the needle in 2020. I think we should be thinking next year and the year after that for initial significant opportunities for that technology. But in answer to your earlier question, we see that as a very important complementary capability. It’s complementary, because as I mentioned in past conference calls, it is what brings power from whatever worldwide AC mains happen to be available to the common denominator 48-volt node, which is the hub, if you will, from which we take customers to the point-of-load.
So, I suggested a moment ago, we have a lead customer that has gone to 48-volt to support the very economic requirements sub involved. And now, wants to complete their system with a solution that is much more advanced and state-of-the-art in that respect to power their systems from worldwide AC mains. So, we see that as state-of-the-art will truly differentiate their system, our solutions, again, in a complementary way from AC mains, there’s another word you opted to be U.S., Japan, any source, AC source, 248-volt and then from there to the point-of-load.
Thank you for the explanation and congratulations. I’m very much looking forward to the order of magnitude return on the $400 million.
We’re counting on it. Thanks very much and we’d be talking to you in a few months. Have a good day.
Good bye, everyone.
Thank you very much. everyone, that concludes your conference call for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.