Vicor Corp

NASDAQ:VICR

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Vicor Earnings Results for the Fourth Quarter and Year Ended December 31, 2017 Conference Call. My name is Lisa, I'll be the operator. [Operator Instructions]

I would now like to turn the conference over to your host for today, James Simms, CFO, please proceed.

[James A. Simms, executive]

Thank you, Lisa. Good afternoon, and welcome to Vicor Corporation's Earnings Call for the Fourth Quarter and the Full Year of 2017. I'm Jamie Simms, CFO, and with me here in Andover are Patrizio Vinciarelli, CEO; and Dick Nagel, our Chief Accounting Officer.

Today, we issued a press release summarizing our financial results for the 3 and 12 months periods ended December 31. The press release is available on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K earlier today with the SEC related to the issuance of this press release.

As always, I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you, various remarks we may make during this call may constitute forward-looking statements for 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 planned products, current potential customers, potential market opportunities, expected events and announcements as well as forecast 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 or in -- set forth and/or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2016 Form 10-K, which we filed with the SEC in -- on March 7, 2017. And will be set forth in Item 1A of our 2017 Form 10-K, which we expect to file with the SEC on or about March 6, 2018.

Please note, the information provided during this conference call is accurate only as of today, Thursday, February 22, 2018. 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 March 9, 2018. The replay dial-in number is [phone], followed by the passcode 78192792. In addition, a webcast replay of today's call will be available shortly on the Investor Relations page of our website.

I will start this afternoon's discussion with a review of our financial performance for the fourth quarter and the full year, Dick will comment on our implementation of ASC 606 and the impact of recent tax legislations, and Patrizio will follow with comments about current business conditions, after which he will take your questions.

Beginning with consolidated results as stated in this afternoon's press release, Vicor recorded total revenue for the fourth quarter of $58.8 million, representing a sequential quarterly increase of 3% and a 22% quarterly increase compared to the fourth quarter of 2016. For the year 2017, total revenue was $227.8 million, representing an increase of 14% over the total for 2016.

Revenue associated with our advanced product portfolio rose 21% sequentially. In contrast, revenue associated with our legacy portfolio of bricks declined 5%. Comparing full year to full year, revenue from advanced products rose 56% in 2017, while legacy revenue was essentially unchanged year-over-year. International revenue, which we identify by the ship to address, roughly matched the growth of total revenue for the quarter.

Turns volume, that is orders received and shipped within the quarter, totaled $17.7 million representing approximately 33% of the quarter's revenue. To conclude on consolidated revenue, recognized stocking distribution revenue declined sequentially by approximately 11%, which we attribute to seasonal factors.

Gross profit margin dollars increased to $27 million for the fourth quarter or 7% sequentially and 25% over the fourth quarter of 2016. For the full year, gross profit dollars increased nearly 12%. Gross profit margin as a percentage of revenue increased to 20 -- excuse me, 45.8% for the fourth quarter from 44.2% for the third quarter and 44.7% for the fourth quarter of 2016.

As Patrizio remarked in today's press release, gross profit margin percentages for our VI ChiP product lines for the fourth quarter of 2017 exceeded gross project -- gross margin percentages for our legacy bricks. This milestone reflects the commitment of manufacturing management to continually reduce costs as well as the leverage of higher VI ChiP production volumes. This milestone is in line with our operating plans and, in management's view, evidence of scalability and inherent cost-effectiveness of our VI ChiP packaging technology.

Operating expenses for the fourth quarter increased $1.4 million sequentially or 5.7%, but were largely driven by higher product development and prototyping expenses and certain noncash administrative accruals. The company recorded a net income tax benefit of $895,000 during the fourth quarter of 2017, contributing to the net income for the quarter. Dick will address this benefit in his remarks.

Net income for the fourth quarter was $1.6 million or $0.04 per diluted share compared to the breakeven performance of the third quarter and a net loss of $2.7 million or $0.07 per share for the corresponding quarter a year ago. I should point out that our diluted EPS for the fourth quarter would've been approximately $0.02 per share, absent a change in the way we account for alternative minimum taxes, which Dick will clarify for us in a moment.

Net income for 2017 was just $167,000, or essentially 0 per diluted share, compared to a net loss of $6.3 million or $0.16 per share for 2016.

Turning to the balance sheet, DSOs remained at 43 days quarter-to-quarter and inventory turns remained at just under an annualized rate of 4x. Our receivables portfolio increased modestly in line with the increase in revenue. Inventories, net of reserves, rose 7.7% sequentially.

Cash and cash equivalents, sequentially decreased $4.7 million for the fourth quarter ending at approximately $44.2 million. This decline was due in part to the timing of certain transactions recorded during the quarter, notably within noncash working capital accounts. We've been increasing raw materials inventories to meet production requirements of our scheduled backlog and are opportunistically building safety stocks when we can.

To conclude my review of the quarter, total employee headcount at the year-end declined to 980 from the prior quarter's total of 1,001, once again reflecting the swings in temporary and student co-op employees. Total full-time employment, however, was essentially unchanged. Productivity is increasing in part because of level loading of quarterly production made possible by greater visibility into our growing backlog.

Dick Nagel will now describe 2 important developments associated with the way we recognize revenue and our accounting for income tax. Dick.

[Richard Nagel, executive]

Thank you, Jamie. As discussed during last quarter's earnings call, we've been working toward the January 1, 2018, deadline for adoption of ASC 606, which codifies new guidance for revenue recognition. The new guidance replaces most of the prior revenue recognition guidance under U.S. GAAP. Our adoption of ASC 606 as of January 1, will be reflected in Vicor's financial statements presented in our Form 10-Q filing for the first quarter of 2018, which we expect to file in early May.

In adopting the new guidance, we have applied the modified retrospective method. With this method, prior year's data is not restated but, instead, a single adjustment of approximately $3.3 million has been made to retained earnings as of January 2018. This increase in retained earnings represents the net effect of application of ASC 606 to existing contracts of customers that are subject to such application.

The most significant impact going forward is on the timing of recognition of sales to our stocking distributors. Through December 31, 2017, we deferred revenue and the related costs of sales on shipments to stocking distributors until the distributors resold the products to their customers.

With the adoption of ASC 606, we're no longer deferring revenue until sale by the stocking distributor to the end customer, instead, we'll record revenue at the time of sale to the stocking distributor and reserve based on our historically-based estimate of returns and allowances provided to the stocking distributor. While there'll be considerable disclosure associated with the adoption, notably in our first quarter 10-Q, we believe reporting at the end of the day will be far more straightforward.

Turning to the impact of the Tax Cuts and Jobs Act enacted in December, the immediate consequence for Vicor was the net benefit recorded for the fourth quarter. The tax legislation eliminated the corporate alternative minimum tax and changed how existing anti-credits can be realized.

Because of these changes, Vicor's AMT credit carryforwards of $736,000 became fully refundable in future years. As GAAP requires the impact of tax legislation to be recorded in the period of enactment, the creation of a long-term receivable generated a tax benefit, which, as Jamie described, contributed to the net income for the fourth quarter.

The reduction of the U.S. federal corporate tax rate from 35% to 21% is the primary effect of the tax legislation, but another notable consequence to Vicor -- for Vicor involve the application of the new lower rate to both the value of our domestic net deferred tax assets and the full allowance we maintain against those assets, also during the fourth quarter.

Because the value of existing tax assets must be reduced to reflect the lower tax rate, Vicor, like many companies, incurred a charge associated with this loss of value, however, this charge was offset by an equivalent reduction in the allowance. As such, these transactions had no effect on our fourth quarter results.

Assuming sustained profitability, this allowance balance, which now totals approximately $33 million, would be released in its entirety at some point in the future and recorded as an income tax benefit, and the remaining carryforwards underlying the deferred tax assets would be used to reduce taxes due across the future periods.

To wrap up on the Tax Act, our upcoming 10-K will have detailed disclosures regarding what I've summarized today as well as additional descriptions on the full extent of the changes brought about by the legislation.

With that, I'll turn the call back over to Jamie.

[James A. Simms, executive]

Thank you. Turning to our outlook, given recent increases in backlog and where we are within the quarter, we anticipate an 11% sequential increase in revenue and further growth in profitability. We also expect a sequential quarterly increase in bookings.

I must remind listeners, as I do each time I speak with you, the decisions made by early adopting customers and their contract manufactures and the timing of those decisions are subject to changes brought about by many factors outside of our control, with the consequence being sudden and anticipated changes in our operating and financial forecasts.

Similarly, I'll remind you of the difficulty of accurately forecasting sales given the characteristics of sales cycles for disruptive innovative technologies. The good news, which Patrizio now will address in his remarks, is these efforts are being rewarded with higher bookings and an expanding quantifiable pipeline of opportunities.

[Patrizio Vinciarelli, executive]

A steady stream of design wins, higher bookings for existing customers, substantial bookings from new customers and recent indications of imminent announcements from high-profile new customers bode well for 2018, starting in the first quarter.

Fourth quarter bookings increased to $71 million, up 11% sequentially and up over 20% on a year-over-year basis. A sequential recovery of bookings for legacy bricks was [indiscernible] by 50% sequential increase in bookings for advanced products from VI ChiP and Picor. Total backlog at the end of fourth quarter was $73 million compared to $60 million at the end of the third quarter and $48 million at the end of the prior year.

Our transaction of the supercomputer segment continues with important design wins in the fourth quarter. Other opportunities we discussed, including applications in aerospace and defense electronics, wireless communications, network infrastructure and solid-state lighting continue to progress, with some moving from preproduction engagements to volume production orders.

We've also recently received encouraging news from a leading customer in the autonomous vehicle space regarding the future prospects. This bodes well for our long-term position in this emerging market.

Notably, during the fourth quarter, the data center markets momentum continue to build based on expanding interest in and adoption of 48-volt bus solutions. Our engagements in cloud and artificial intelligence applications, as well as with XPU vendors serving key end customers and their captive needs, showed further encouraging results.

We believe 2018 will be a breakout year in which adoption of Factorized Power solutions, including Power-on-Package will expand rapidly with breadth across key industry players driven by explicit acknowledgment of adoption of our solutions by market leaders.

Customers are very interested in Power-on-Package, a Factorized Power system consisting of modular current multipliers, so-called MCMs, and modular current drivers, so-called MCDs. Our power stage technology has enabled high-visibility market leaders to achieve unprecedented levels of performance with new 48-volt input XPUs that will soon drive widespread adoption of Factorized Power system solutions.

This is all I could say, but I'm sure listeners have many questions, so we will open the call.

[James A. Simms, executive]

Lisa?

[Operator]

[Operator Instructions] The first question comes from the line of Don McKenna.

[Unknown Analyst]

I wanted to ask -- I know you had the 11% increase in bookings over this past quarter. What you might see for the rest of the year, do you think you might be able to achieve a 5% a quarter -- sequential quarter increase? Would that be within reason for you?

[James A. Simms, executive]

I think we should be able to exceed that.

[Patrizio Vinciarelli, executive]

So thus far, this quarter we're well ahead of last quarter.

[Unknown Analyst]

Yes. And then sequential quarters after that, do you see the momentum building at that same kind of level? Or do you -- would it be lower rates?

[Patrizio Vinciarelli, executive]

The forecast for the year shows the progression through the quarters. I think forecast in recent quarters have been -- have shown themselves to be conservative. Certainly, there was the case in Q4, and it is the case thus far in Q1.

[Operator]

The next question comes from the line of John Dillon.

[Unknown Analyst]

Patrizio, I wonder if you can comment on the new plant that you've talked about. Is that still on schedule? Are you still looking at breaking ground this spring?

[Patrizio Vinciarelli, executive]

So we've had a change of plans regarding that. What we concluded after investigating certain options in the neighborhood of our existing Federal Street facility is that a building of the order of 80,000 to 100,000 square feet would not serve our long-term needs. So we were able to secure a deal with a partner to help our short-term capacity requirements to give us some breathing room for breaking ground on larger lot with considerably more room for expansion. So we're looking at options for as much as 250,000 square feet, which would be equivalent in terms of capacity to our Federal Street building.

So to recap, late last year in the fourth quarter, we came to the conclusion that rather than divert our effort in the short term from other operational challenges to the expansion in facilities, we should seek and we procured a short-term partnership to help with those capacity bottlenecks that would otherwise impact, in particular, SM-Chip prod line. And that gave us the breathing room we're going to need for a bigger but somewhat longer-term expansion. So my guess at this point is that the breaking of new ground in a larger lot and with larger square footage may not take place until either the latter part of this year or, more likely, the first half of 2019. So we reconfirm that within Federal Street, we have the wherewithal to expand capacity to about $0.5 billion in yearly revenues with judicious choice of the space and our location of manufacturing processes.

[Unknown Analyst]

Can you elaborate on the partnership? Is this a licensing deal? Or is it somebody who's going to be doing some contract manufacturing for you?

[Patrizio Vinciarelli, executive]

It's contract manufacturing for us. So we've entered into a long-term deal, guaranteeing a fraction of our capacity requirements, and it's a great partnership that is going to bring about significant benefits to us.

[Unknown Analyst]

Can you say who the partnership's with?

[Patrizio Vinciarelli, executive]

No, not at this time.

[Unknown Analyst]

And is it domestic or international?

[Patrizio Vinciarelli, executive]

It's domestic, and not far away from our existing facilities in Northern Massachusetts.

[Unknown Analyst]

Excellent. And did that had something to do with the cash that you -- you had a pretty big cash burn this quarter. I'm just wondering if that went to capital equipment or something else. It wasn't really clear was that went to.

[Patrizio Vinciarelli, executive]

So in the past quarter, it wasn't -- capital equipment was primarily -- even though, there was some capital equipment investments, but it was primarily working capital-related materials and the like. So the decision is predicated on the reasoning outlined a little while ago. The realization that this year, given ramps in key new prod lines, we'd be better off subcontracting out those process types that can be rather easily subcontracted out, while keeping in-house those process steps that, in a way, are more proprietary and critical to the end product. And again, by doing that, we gave ourselves extra time to make provision for a much larger expansion. There's going to be market [indiscernible] in terms of economies of scale. Fundamentally, with the addition of an 80,000 square foot building, we'd be incurring non-negotiable incremental fixed costs without that much of a capacity expansion relative to a 250,000 square foot facility we already have. And a smarter increment or capacity that would be more economical and longer term in terms of the capacity expansion requirement is adopting our existing facility. In the short term, that's not something that needed to be done or could be done, hence, the partnership to give us the breathing room to do it late this year or the first half or next year.

[Unknown Analyst]

Okay. And just to expand on Don's question a little -- with your answer. When you said you're ahead of last quarter as far as booking through, are you referring to the sequential growth in bookings that you had last quarter? Or are you referring just the total amount of bookings? So can we...

[Patrizio Vinciarelli, executive]

So we're passed the $50 million mark already on February 22. So the water is looking quite good in terms of the bookings, right.

[Unknown Analyst]

I'm sorry, you said the booking, so far, are $50 million?

[Patrizio Vinciarelli, executive]

Yes, north of $50 million.

[Operator]

The next question comes from the line of Jim Bartlett.

[Unknown Analyst]

A few questions. One, when used -- on the margin question with advanced products, is that including Picor? Or is that just on the VI ChiP products where you said that the margins were -- had surpassed the legacy products?

[Patrizio Vinciarelli, executive]

The Picor margins have been quite good all along, at least once Picor achieve some level of critical mass. So the remarks were specific to our VI ChiP products.

[Unknown Analyst]

I just want to make sure that even -- that is a very big step-up.

[Patrizio Vinciarelli, executive]

Well -- so I don't think there's a little magic in this as we've indicated all along. We have significant fixed costs, and those fixed costs need to be absorbed with greater volumes to bring about economies of scale and manufacturing efficiencies and, ultimately, good margins. We believe we have, with our packaging technology, an inherently very cost-effective, very scalable PoP platform, again, tremendous capability, tremendous flexibility, and you need cost-effectiveness. There's nothing that, in these products, would keep them from being able to compete on cost with conventional technology with a much lower level performance. So this is just a volume game. We need to build volume to achieve those economies. And as we achieve those economies, we're going to be able to become even more cost competitive in the marketplace, while at the same time delivering better margins.

[Unknown Analyst]

At one point, you gave a breakdown of what kind of percentage gain you had shown in 48-volt for the company as well as the dollar amount. Would you be willing to do this again given the importance of what's happening here in 48-volt?

[Patrizio Vinciarelli, executive]

Yes, so I think one way to answer the question would be in terms of power densities or current densities, those are key figures of merit in the industry. But perhaps, from my perspective, the most significant way to capitalize competitive advantage is in terms of enabling customers to accomplish levels of performance with their own products that are otherwise unattainable. So the level of performance that we've enabled in data centers could not have been achieved without our technology and...

[Unknown Analyst]

I -- the importance of that. What I was saying is, for example, that you had so much revenues, some percentage of your -- the Vicor business last quarter was 48-volt, and it -- that revenue base increased by how much for you?

[Patrizio Vinciarelli, executive]

So what we call advanced products, within the last year, grew by slightly over 50%. And one way to look at the revenue makeup is that fundamentally we have a legacy business that is essentially flat up and down a little year-over-year. And then, we have the new products that we've been talking about for quite some time that have grown substantially are now at the level of really moving the needle because -- well, they used to be a tiny little fraction of total revenue, they're not quite comparable. And I think before too long, this year, we're going to see them exceeding considerably the legacy business. So with that comes leverage with respect to the top line, with that comes leverage with respect to the bottom line. And going back to my answer to the...

[Unknown Analyst]

Right. So [indiscernible] quarterly, advanced products almost all 48-volt?

[Patrizio Vinciarelli, executive]

I wouldn't say there are only 48-volts. Because with VI ChiP technology, we're able to address requirements from the wall plug, be it the single-phase AC or 3-phase AC, to the point of load. But generally speaking, our strategy revolves around the 48-volt hub. So while many of these products have to do with taking the solution, a power different from 48-volt to the point of load, we have new applications where, in fact, we take customers from high-voltage passes or AC input voltages, single-phase and 3-phase, to 48-volt. Again, the power conversion technology and the unique packaging technology support this breath of application capabilities. And that's an essential part of our strategy. It's something that, once again, very must differentiates our approach from other companies in this space.

[Unknown Analyst]

So you are now getting so-called front-end business? You had mentioned it one point the past where that front-end business, which would be reflected in the...

[Patrizio Vinciarelli, executive]

Yes, we are getting -- we got them within the last year and are getting more and more traction with our front-end business. There was a customer -- potential customer, I should say, at the beginning of last week where -- for temp business, this is still a couple of years out, it's potential of the order or kind of revenues was possible, at one customer. And thus, front-end business.

[Unknown Analyst]

And when would that start impacting -- if you are including that within the BBU...

[Patrizio Vinciarelli, executive]

That's not in our forecast. It's not in our current plans. It's highly speculative at this time. It's just indicative of potential. Generally speaking, the AC/DC portion of the TAM is actually larger than the 48-volt to point-of-load portion. You can imagine that, in fact, all the power goes through the power chain starting at the source, which is typically AC to the point-of-load. And to the extent that not all of the point-of-load power is necessarily provided by our solution in applications where we provide the complete power system solution, in terms of deploying not just point-of-load solutions for a portion of the system, but also the front-end solution, the value of that opportunity is more than factor to greater than just supplying point-of-load solutions.

[Unknown Analyst]

Okay. But right now the big growth is data center and 48 point-of-load?

[Patrizio Vinciarelli, executive]

Right now, the growth is coming from point-of-load solutions. I think it's also coming from other applications of, in particular, VI ChiPs that include front-end types of systems. So that's seen already in the works, and it is growing. I don't have in front of me a relative growth rate to quantify for you, but I know, in general, that it is also quite substantial.

[Operator]

The next question comes from the line of Alan Hicks.

[Unknown Analyst]

I had a question on -- you had a few delays that you talked about last quarter, one of which was this supercomputing project in Japan. Is that still going ahead?

[David Fick, executive]

So the supercomputing project in Japan had a setback the last quarter having to do with some legal issues that popped up and involved the CEO of the company. And because of that, there've been further delays. But the outlook, as we understand it, is good in that a new management, top management, may be brought in very soon and projects that were put on hold will likely resume as early as in the next quarter. So that particular engagement has suffered the setback. We think it may well be a temporary setback. But clearly from what has been going on in terms of our bookings and -- both in the fourth quarter and this quarter, thus far, and in terms of the forecast for this year, it's certainly a minor glitch that has been more than made up by a lot of other very exciting opportunities.

[Unknown Analyst]

Okay. So that may ship next quarter? Or it would be the soonest, I would assume?

[Patrizio Vinciarelli, executive]

Well -- so we'd like to wait and see what happens given the change of leadership and new owners and their plans. But without getting into details -- by the way, we're not that privy of. But from what we can surmise, there's likely to be a resumption of activity soon.

[Unknown Analyst]

Okay. So orders must be very strong in the data center area then?

[Patrizio Vinciarelli, executive]

Well, we are very diversified. So maybe I wasn't clear enough in, I'll say, in the earlier question. One should not assume that all the action is at the point-of-load. Needless to say, there's a lot of action there, it's very exciting, it's going to get a lot more exciting soon. But that's not to say that that's the only place we're making inroads. We are making inroads elsewhere. And there's tremendous success, in particular, with our front-end products. Monday and Tuesday last week, there was 2 customers -- potential customers, I should say, in the West Coast and tremendous interest in the solutions, with a lot of revenue potential.

[Unknown Analyst]

Is that in the VI product area?

[Patrizio Vinciarelli, executive]

No. These are -- it's front-end product that we pioneered with the Japanese customer that we were discussing a moment ago, and we're now beginning to market it to the rest of the world.

[Unknown Analyst]

Okay. Just looking broader at the supercomputing opportunity. It seems like, worldwide, there's a race going on to build the biggest, fastest supercomputers and it could be a national defense issue. And it seems like you're really well-positioned there. Can you comment on other opportunities in supercomputing?

[Patrizio Vinciarelli, executive]

So we're very well-positioned there. And I will say that we're similarly well-positioned wherever established companies and entrepreneurs with new startups are breaking new grounds in resetting the bar with respect to computing capabilities. So a common trait of these applications is that the kind of levels that require to enable state-of-the-art ASICs operating at 0.8 volts going down to 0.7 volts, more and more we're seeing requirements ranging up to 500 amps, 600 amps, 700 amps, 800 amps with transient requirements of 1000 amps. And for anybody on the call whose well-versed with the significance of that, those are huge current levels, where our current multiplier technology that enables a factor of 40 or 50 or 60 at the point-of-load within the package, is the capability that nothing else can support. And so, as I was articulating a little while ago, the true test of superiority is in enabling solutions by customers that cannot otherwise be made to app. That's what gets customer excited. It's not the density by itself is enabling high levels of performance that give them a strong competitive advantage. And we're going to see a lot more evidence of that in months to come.

[Unknown Analyst]

Okay. Is that -- the PoP product, is that part of that?

[Patrizio Vinciarelli, executive]

Yes, the PoP product is very much part of that. So we're getting more and more design wins to power supercomputers on a very, very small scale, a wide variety of ASICs, GPUs, XPUs of one form or another.

[Unknown Analyst]

Okay. Then there was a couple other delays, you -- last time you mentioned shortages in memory, somewhat customers redesigned their boards for 48-volt being more effective. And also, there was non-Intel chip that you were working with that got delayed.

[Patrizio Vinciarelli, executive]

Yes, so I think you may be referring to some of the issues that had popped up earlier in 2017. Many of those issues got resolved even though there is few shortages, the industry is undergoing a period of relatively tight supply. And that's still a consideration, but the specific bottlenecks that were referenced in an earlier call, I think this was probably 2 or 3 quarters ago, those got resolved.

Regarding traction in Intel sockets and non-Intel sockets as suggested by the earlier comments, we're seeing a lot more traction across the board. And I would say that when it comes to sub-1 volt ASICs that consumes hundreds of amperes, we're really the only game in town to enable those kind of solutions. For Intel sockets, where -- because of an internal regulator that's used within Intel chips, where the power delivery is done at 1.8 volt, which is higher voltage, much lower current, that's where there's more of a competitive landscape. Because those requirements, in a way, are not as demanded, are not as pressing in terms of the 700 or close to 1,000 amperes. But we're seeing more and more opportunities come up for those sub-1 volt ASICs. I think a lot of AI activity that's going on in one form or another is to do with chips that have those kinds of current consumptions. And again, whether it's ASICs or GPUs, the trend there is for current capabilities that will very soon get very close to 1,000 amps. And that's where a current multiplier is, far and away, the best solution.

[Unknown Analyst]

So you're able to work with probably a few different processors?

[Patrizio Vinciarelli, executive]

Yes. We're engaged on a -- with many customers on more and more projects, particularly in the sub-1 volt ASICs, GPU, XPU area.

[Operator]

The next question comes from the line of John Dillon.

[Unknown Analyst]

Patrizio, I'm wondering if you could give us more color on how you're doing with GPUs and, also, Nvidia in particular?

[Patrizio Vinciarelli, executive]

I really cannot comment with respect to specific customer engagements. I think we're going to have to wait for announcements to be made.

[Unknown Analyst]

The reason I bring it up is, in some of my research, it's turned up that you are working with those guys. And what I see is, whenever I see that picture of the Nvidia chip, I see 16 converters outside of it and it drives me crazy, because this exactly the type of opportunity you're talking about. It uses a lot of power, it's got a high current draw and your PoP would be perfect for that product, and they're in the data centers and they're in the auto. So can you talk about GPUs in general that use high power? Can you give us a little more color on how you doing with those?

[Patrizio Vinciarelli, executive]

So let me -- I cannot comment with respect to specific customer engagements.

[Unknown Analyst]

Sure, I understand.

[Patrizio Vinciarelli, executive]

But I can say the following in very general terms that, to your point, for demanding applications, current requirements keep going up to levels that challenge the traditional solution involving, to your point, 12, 16 phases operating from a 12-volt bus. The power delivery at 12-volt is challenged. The limitations of having to deploy 16 different separate powertrains in parallel to supply these XPUs is challenging and limiting in terms of what you can do with them, the level of performance you can achieve with them.

But there's also another factor and that is, I think, you hinted to it, the fact that automotive is going to 48-volt. Now higher bus voltages in automotive, higher than 12 volt have been talked about for a very long time. There was an initiative many, many years ago to bring about a 42-volt infrastructure, and didn't get really anywhere. There were some test cases and [indiscernible] around 42 volt, but it didn't really gain long-term traction. But there's no question, at this point in time, that with autonomous driving, with a lot more electronics in vehicles, that -- even with average systems, because of certain economies that can be brought about by adding a 48-volt backbone, that the automotive marketplace is going to be migrating to 48-volt. And that brings about a convergence of requirements where, fundamentally, you have to come to 48-volt both in terms of powering ASICs, GPUs that demand a lower current, and you have to come to 48-volt because that's going to be the infrastructure in automotive. And there's an old saying that automotive can drive the rest of the industry, so I see that happen.

[Unknown Analyst]

Excellent. And the other point, I guess, is with -- whenever I look at that Nvidia chip with 16 converters, I think all of pins that can be freed up. And I've been working with engineers for 30 years and always complaining about how they don't have enough pins. So that's got to be a driving factor for Vicor also, isn't it?

[Patrizio Vinciarelli, executive]

So one of the distinguishing traits of our Power-on-Package is in -- and this what one of the benefits that I was implicitly alluding to in commenting earlier about the enabling value of technologies, more than delivering a lower current at the low voltage is -- in particular, when it comes to Power-on-Package, freeing up those pins and those boundaries of an XPU that are otherwise consumed by the power delivered. If the power delivered is to be done at 0.8 volts or even 1.8 volts and hundreds of amperes, we can only imagine that takes a lot of pins. And that constraints what you can do in terms of information connectivity as opposed to power delivery. A current multiplier, such as our MCM, which can multiply current by 64x, reduces the number of pins that need to be devoted to power delivery by 64x, rendering in effect the intrusion by the power delivery to a negligible fraction, and freeing up that real estate, those boundaries and the pins for value-added function for the XPU developers. And so that's a big value proposition. One that we pioneered with our key customers a couple of years ago, and which, within the last 1.5 year in Japan and now in the U.S. with most of this year's customers is really taking off. And we see a lot of future opportunity arising in that general framework.

[Unknown Analyst]

Great. And you mentioned -- I mean, you've made some progress in the auto, could you just give us a little more color? Does this mean you're going to have revenue seen from the auto industry? Or when would you expect significant revenue from the auto industry?

[Patrizio Vinciarelli, executive]

So I can't say. Again, I cannot name names. But we power the most advanced autonomous driving system in the world. And the power delivery is with advanced products, the kind we've been talking early in the -- in this conference call.

[Operator]

The next question comes from the line of Jim Bartlett.

[Unknown Analyst]

Just to follow-up on John's question of -- when you might be seeing revenue in -- from the auto sector. My understanding is that, that was a ways off, another part of that depends on this year's strategy and dealing with the automotive sector given the supply chain issues?

[Patrizio Vinciarelli, executive]

So from what we can see, we believe that 2019 is going to be a year in which there begins to be significant autonomous driving. And with that, we expect to see what you might call direct revenues from automotive. I think there's also opportunity for indirect revenues by way of systems. XPUs powered by a 48-volt solution that gets sold into automotive applications, harder to forecast that opportunity. But I think it's fair to say that next year and, perhaps more significantly, come 2020, we're all going to see real-world autonomous driving and, with that, a lot of opportunity. 2020 is also year in which 5G will come about. And with that, what we're going to see is a hundredfold increase in the level of connectivity that is enabled by 5G. And whether or not we're involved with the 5G network itself, you can imagine that, that expansion in bandwidth and connectivity will carry with it significant expansion in hardware that needs to be powered in automotive systems and in specialized system. So I think, generally, in automotive, we're going to see action. I think we're involved at some level, but it's still "de minimis" in terms of our revenues. But we're going to see some significant contribution in terms of '19 and more significantly in 2020.

[Operator]

There are no additional questions in queue.

[Patrizio Vinciarelli, executive]

Very well. Talk to you soon.

[Operator]

And gentlemen, you may now disconnect. Have a wonderful day.