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Vicor Corp (NASDAQ:VICR)
Q2 2020 Earnings Call
Jul 23, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome everyone to the Vicor Earnings Results for the Second Quarter ended June 30, 2020 Conference Call, hosted by Dr. Patrizio Vinciarelli, CEO, and James Simms, CFO of Vicor. My name is Shandor and I am your event manager. [Operator Instructions]

And now I would like to hand over to James. Please proceed.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Thanks, Shandor. Good afternoon, everyone, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2020. I'm Jamie Simms, Chief Financial Officer and with me here in Andover are Patrizio Vinciarelli, CEO, and Phil Davies, Vice President of Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three months ended June 30th. This press release has been posted on the Investor Relations page of our website vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation.

I also remind you various remarks we make during this call may constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, and our capacity expansion as well as management's expectations for sales growth, spending and profitability are all forward-looking statements involving risks and uncertainties.

In light of these risks and uncertainties, we can offer no assurance that any forward-looking statements will in fact prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2019 Form 10-K, which we filed with the SEC on February 28, 2020 as well as in the prospectus supplement associated with our recent share offering, which we filed with the SEC on Form 424B5 on June 9, 2020. Both of these documents are available via the EDGAR system on the SEC's website.

Please note, the information provided during this conference call is accurate only as of today, Thursday, July 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 this call. A replay of today's call will be available beginning at midnight tonight through August 7, 2020. The replay dial-in number is 888-286-8010 followed by the passcode 41685203. 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 a transcript will be available shortly on the Investor Relations page of our website.

I'll start this afternoon's discussion with a review of our Q2 financial performance, after which Patrizio, Phil and I will take your questions. I'll begin by addressing Vicor's response to the COVID-19 pandemic. As reported last quarter, Vicor has taken substantial measures to protect the health and safety of our employees following local government and federal CDC and OSHA guidelines for employee wellbeing. Using masks and practicing social distancing, since Q1 we have operated three shifts at our Andover manufacturing facility, while our engineering, sales and administration -- administrative personnel are now working in their offices if allowed to do so under local rules.

I refer listeners to our pending Form 10-Q filing which will set forth updated details regarding our response to the pandemic and the impact it has had on our operations. Although, there is uncertainty related to the extent the pandemic will negatively influence our future operational and financial results, we believe our liquidity, flexible operating model, existing raw material inventories and dedicated workforce will enable Vicor to continue to effectively conduct business until the COVID-19 pandemic passes.

We are monitoring changing circumstance worldwide and may take additional actions to address COVID-19 risks as they evolve, particularly if federal, state and local government so require. Because much of the potential influence of COVID-19 is associated with risks outside of our control, we cannot estimate the extent of such influence on our financial or operational performance or when such influence might occur.

Now, turning to consolidated results. As stated in today's press release, Vicor recorded total revenue for the second quarter of $70.7 million, up 11.6% sequentially from the prior quarter's $63.4 million. Advanced Products revenue rose 36.1% sequentially, primarily reflecting ramping shipments of our lateral power solutions for AI acceleration. Brick Product revenue rose 2% sequentially, reflecting a recovery of Asian markets, notably China, offset by reduced domestic shipments, reflecting the influence of COVID-19 on U.S. manufacturing. The pandemic contributed to both lower shipments to stocking distributors and overall lower turns volume for the quarter.

We supply a range of essential industries. Some domestic customers including defense contractors significantly reduced production in Q1 and have yet to return to pre-pandemic demand levels. We are hopeful our U.S. business, once the pandemic abates, will experience the same quick recovery our Chinese business has experienced. We do not believe this demand is evaporated, but consider it postponed.

For Q2, Advanced Product share of total revenue rose to 34.4%, while Brick Product share declined to 65.6% of total revenue. Our expectation is that Advanced Products will continue to grow their share of revenues, even as domestic Brick Product demand recovers. Exports increased as a percentage of total revenue to approximately 70%, reflecting the aforementioned recovery of Asian demand for Brick Products and a near doubling of shipments of Advanced Products to Asian subcontract manufacturers, building systems for our OEM customers.

Shipments to European customers also recovered, reflecting the shift in the impact of the COVID-19 pandemic from China to the United States, domestic revenue declined to approximately 30% of total revenue. Despite higher unit volume, the ongoing impact of the pandemic on our supply chain partners as well as mix considerations cause consolidated gross margins as a percentage of revenue to slip 0.3 percentage point sequentially from Q1's 43.1% to 42.8% for Q2. We again encountered production inefficiencies and cost variances as vendors struggled with COVID-19 challenges.

Gross margin was also burdened by higher tariff charges totaling $2 million for the period. Unfortunately, U.S. customs is yet to address our duty drawback filings, so we have yet to recover any amount of the total of $9.4 million paid in -- to-date in tariffs on Chinese imports. As previously discussed, we anticipate more than half of this amount is eligible for drawback.

I'll now turn to Q2 operating expenses. Total opex declined 4.8% sequentially with the decline associated with a decline in G&A expenses, namely audit and legal costs, a decline in travel costs with sales and marking -- marketing given the pandemic and a decline in prototyping and related costs in R&D. For the quarter, we incurred approximately $236,000 of incremental employee safety and wellbeing expenses directly associated with our response to the COVID-19 pandemic. Also, please note the expenses associated with our June equity offering were recorded as a charge to paid in capital and were not reflected on our income statement.

As highlighted in our press release, overall Q2 results were affected by a $1.2 million non-cash charge associated with the acceleration of equity-based compensation expenses tied to an award of stock options in June. One might expect that the value of the award would be recognized pro-rata over the five-year vesting period of the options. However, because our option plan allows for anyone to retired at an age 62.5 and retain their unvested options over the original vesting period, the required accounting is for us to record at the time of the award all of the compensation expense for employees who have reached that age. The amounts of total equity-based compensation expense for Q2 including -- included in cost of goods, SG&A and R&D were approximately $277,000, $1 million and $629,000, respectively, totaling $1,936,000.

We recorded operating income of $2 million, representing an operating margin of 3%. Without getting into non-GAAP disclosure, I'll simply point out that absent the $1.2 million compensation charge, the $2 million tariff charge and certain expedite fees and vendor surcharges totaling $1 million for the quarter, our operating margin would have been appreciably higher.

Turning to income taxes. We recorded another small benefit for Q2 of $406,000, although we are forecasting full year profitability. The next -- the net tax benefit for Q2 and year-to-date was primarily due to result of the income tax accounting required for stock options exercised during those periods. Net income attributable to Vicor for Q2 totaled $2.7 million. GAAP earnings per share was $0.06 based on a fully diluted share count of 43,385,000, which includes 1,741,000 exercisable options. As a reminder, we issued 1,767,231 shares, including the underwriters' over-allotment option in our June the share offering.

Turning to our balance sheet. Cash and cash equivalents sequentially increased $4.2 million before taking into account the $109.7 million net proceeds from our June share offering. Cash at period end totaled $96.7 million. Accounts receivable net of reserves totaled $48.5 million at quarter end, with DSOs for trade receivables increasing slightly to 45 days from the prior quarter's 42 days. All balances are current and we have made no meaningful accommodations to customers due to COVID-19 challenges.

Inventories, net of reserves rose 4.3% sequentially to $55.6 million, as raw materials increased to support our near-term outlook for increasing production. Annualized turns remained at 2.8. Capital expenditures for Q2 totaled $5.3 million representing the value of equipment placed in service during the period. In contrast, at quarter end, we had over $47 million of approved capital projects under way. The balance of the budgeted projects currently estimated to be approximately $15 million likely will be approved by year-end, bringing the total for the expansion to approximately $62 million.

We expect to disburse approximately $25 million before year-end, with the balance to be disbursed in 2021. As previously disclosed, construction is now under way at our 400 Federal Street manufacturing facility, but we do not expect much of the total $62 million amount to be placed in service before mid-year 2021.

I'll now address bookings and backlog. Q2 bookings rose to $87.5 million, a sequential increase of 24.9% the overall book-to-bill was 1.24 with Advanced Products at 1.35 and Brick Products at 1.18. At quarter end backlog totaled a $127.5 million, an increase of 15.1% sequentially. We earlier mentioned the challenges faced by customers and the current backlog balance includes approximately $8 million of orders rescheduled from Q2 into Q3 and Q4, either by us or by customers due to COVID-19 related challenges.

Turning to our outlook for the third quarter, we expect strength in bookings for Advanced Products given our customers' forecast. Brick Product bookings in July continue to show strength in Asia, notably in China, but we have not yet seen indications that domestic demand may be resuming. Having said that, based on existing backlog scheduled for Q3 and of course subject to the near-term influences of COVID-19, we are forecasting increased revenue and improved profitability for the third quarter.

With that, Patrizio, Phil and I will take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] All right, we have already received a couple of questions. And the first question is coming from the line of Jon Tanwanteng. Your line is open now, please proceed.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Good afternoon, gentlemen. Thank you for taking my questions and very nice quarter.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Hi, John.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

First one from me, can you discuss how much COVID impact you had in the quarter on a COGS basis and is that been resolved in July?

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

I probably could give you a pretty good number, but I won't. The issues are still in play, but we have taken steps to remedy, some of the variables, and we're hopeful that things will improve. But I suspect that for the coming quarter, we will still face some of the inefficiencies and challenges that we discussed. Is that fair?

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Yeah.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah, so the mission right, things are in many aspects more stable now than they were earlier in the year and certainly there has been plenty of opportunity to adjust to the new environment, but with some suppliers there are still occasional issues.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Yeah. I'll point out, as we discussed in the MD&A of the Q, absenteeism has improved significantly from what we were experiencing coming out of Q1. So we have some areas of less risk, but there is still risk.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Understood. And then moving onto the bookings, $87.5 million is a fantastic number. I was just wondering is that -- is the timing of that any different from your regular order pattern when those are scheduled to be delivered? Should we expect that to hit your P&L over the next one to two quarters, or are there any different patterns in delivery schedules involved here?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

This is Phil. So, so yeah, it was a good bookings quarter. I think that what Jamie talked about in his remarks here was the strength that we're seeing with Advanced Products as we start to ramp our lateral power delivery solutions and also some standard 48V to 12V and 48V to load products that we supply into the data center hyperscalers and HPC type companies, but we've also seen some tremendous strength coming out of China.

I mean, if you look at what China has gone through from a negative GDP in Q1 to a very large -- rise of like almost 9% in Q2, we've huge investments continuing in infrastructure there. So we benefited from that with really good bookings on our Brick technology if you like. So those have been laid in for Q2, Q3. Our lead times are still 20 to 24 weeks we've maintained those. We don't anticipate reducing them anytime soon because of the supply chain challenges, but that factors in a little bit as well.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Got it. And then just to clarify, you are expecting improvement in the next quarter on your orders for the Advanced Product. Did you also mean that on a blended basis or it's too early to tell just where you see bookings go to in Q3?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

I think we're still going to see good strength in the Brick line and as Jamie mentioned increases in the Advanced Product, so we see that from our forecast. Yeah.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Okay got it. And then last one for me, a large AI player or at least a unicorn by many standards released or showed off a new product yesterday, and I didn't see Vicor at least on the product board that they showed to the public. I'm wondering, if you're involved in, and most of these projects as you've been telling people in the past.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Yeah, you're talking about the Graphcore?

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Graphcore. Yeah.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Okay. Oh, Graphcore. Oh, yeah. so no -- so there was another enhancement from company called I think it's Groq [Phonetic] as well, they announced I don't know if you saw that one, that was an AI influence chip very specialized type of product. And both of those companies are using multi-phase at the moment because their current levels are still quite low, they're in that 300 amp range, but I know that next-generation chips are going up significantly, and they're moving to 48-volt systems using Vicor technology.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Got it. So it's more a matter of timing than anything else?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Yeah. A lot of these guys start off in the 300 to 400 amp range for their first silicon and then the next silicon is got to go up in performance because they're all competing with NVIDIA. So that's where we step in.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Understood.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So, as we discussed in the past, the threshold of pain for 12 volt systems is such that with power levels in current levels of a few hundred amps is still tolerable, but it just becomes intolerable as you get passed for 500 amps. And all of this -- the whole animal kingdom Unicorn and otherwise, so they're all heading for the same boat in terms of being able to compete with each other.

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Understood, thank you for the color.

Operator

Thank you very much. The next question is -- the next question is coming from the line of Hamed Khorsand. Your line is open now, please proceed.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. Just wanted to see how much of an increase in Advanced Products is relates to just inventory stocking?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

I don't think any. Phil, do you want to...

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Yeah, I don't know, but I don't think there's any. I think that's the simple answer.

Hamed Khorsand -- BWS Financial -- Analyst

Okay.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Any questions.

Hamed Khorsand -- BWS Financial -- Analyst

And my other question was are there manufacturing inefficiencies you encountered are they manageable or is it something that's going to continue for the foreseeable quarter?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So COVID as we discussed earlier. It was an issue particularly in the March-April timeframe, it's a diminishing issue, but it has been an issue. And as Jamie suggested, it may still to some degree be an issue this quarter, obviously, we'll watch the same news and we'll have to wait and see what happens in our area, things are getting much better than they used to be. As Jamie mentioned, we're essentially back 100%. But we do have some vendors in other areas that are still under COVID, right.

Now, beyond that when it comes to manufacturing efficiencies. The other factors, so not just COVID, it's the scale up of new platforms in the early going, it's not unusual, particularly with new packaging technology to have inefficiencies until we made substantial quantities and get yields to where they get once this maturity and cycles of learning have been reflected into fine tuning to manufacturing processes.

So we're still going to be seeing some of that, it's baked into the results within the last few quarters and it will impact results going forward to extent. Capacity utilization is another big factor with respect to manufacturing efficiency and product margin. And James speaking, as we scale up our best products, those efficiencies are going to get better and better.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And my last question was, are you seeing any changes in order patterns with your lateral power delivery products right now with -- especially with NVIDIA's release of new products couple of months ago?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

No, we are on a steady ramp.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

We've been increasing.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah. But we really don't want to make comments specific to any one customer to guess [Phonetic], right.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Across the board.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Across the board. Yeah.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, thank you.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

So we have more than one question for that stuff. So it's important to reflect that.

Hamed Khorsand -- BWS Financial -- Analyst

Appreciate. Thank you.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Thank you.

Operator

Thank you very much. And the next question is coming from Quinn Bolton. Your line is open now, please proceed.

Quinn Bolton -- Needham & Company -- Analyst

Hey, guys. Congratulations on the results and the nice bookings number. I guess, I wanted to start with bookings, could you give us the split of the $87.5 million, how much of that was Brick? How much of that was Advanced Products?

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Well, I sort of did already, but with book-to-bill...

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah. So I think you can do the math based on the numbers that, James provided earlier interaction with.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Yeah, I don't have the specifics right in front of me, Quinn.

Quinn Bolton -- Needham & Company -- Analyst

Understood. Second question and I understand that this maybe a little customer specific, but one of your lead customers on lateral power has a 48-volt solution as well as a 12-volt PCI solution. Do you have any sense what the mix of that business will be going forward?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

That's obviously aimed at very different marketplace, right. I mean PCI is really struggling right now with the power levels and they're having to pump into those boards. So eventually they'll move to 48-volts and that will be a great entry point for us. But it's a very different space than the space that we are in. And most of these guys in terms of the training, workloads that they're having to do I mean, that's really where we're playing at the moment, Quinn.

Quinn Bolton -- Needham & Company -- Analyst

I guess, maybe another way to ask, do you think most of the training applications will be 48-volt?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Yes. Absolutely, yeah, I mean that's such a heavy workload. And again, on the input side as it moves out toward the edge again those process of power levels are going to continue to increase. So in the workload they are going to continue to go up, right. So I see us playing in the edge eventually as well.

Quinn Bolton -- Needham & Company -- Analyst

Great. And then, Jamie, obviously you guys have talked about some of COVID related inefficiencies that you're working through. As you continue the expansion of the Andover facility, do you expect any inefficiencies just with that expansion project?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

No, we don't. We got that very well planned, very seasoned, mature operations team. So they got that very well planned. And we just got an update earlier today, everything is on track. We don't anticipate any interference with production within the existing wall. So fundamentally strategy is to prep the space, the additional wing and build it up, needless say there is going to be some times when communication conduits have got to be provided between the two. But that's being planned to happen a particular of time. So as not to interfere with the production cycle.

Quinn Bolton -- Needham & Company -- Analyst

Great. And then my last question, you've mentioned some rescheduling of bookings from Q2 to Q3, Q4. I wasn't sure if that was due to some of the production inefficiencies, you talked about, you said that there were some suppliers that were having issues. I guess my question is, do you feel like you're leaving demand unfulfilled or have you been able to manage to your customer forecast despite some of these inefficiencies?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

We're able to manage to customer requirements, they tend to change. That's the nature of the industry, while some of the backlog that was in Q2, moved into Q3. This is nearly a fraction of advance schedule with some customers, there is nothing unusual about this particular period relative to other periods. I think it's been relatively routine in that regard.

Quinn Bolton -- Needham & Company -- Analyst

Understood. Okay, thank you.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Thank you very much. The next question is coming from the line of John Dillon. Your line is open now, please proceed.

John Dillon -- D&B Capital. -- Analyst

Yeah. First of all congratulations, guys. This is a really, really nice quarter to say. My question is kind of been answered, but I was wondering if you can give me a little more color on it and that's on bookings. I'm just wondering if the bookings increase is due to a couple of your larger customers priming the pump or is it more of a steady state from a wider diverse customer base?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

It's both, as well as what we've talked about which is the growth of the -- or the Asian business sort of returning to strength. So it's sort of across the board, but yes, we are getting some nice bookings ramps, if you like from the data center AI guys we have been talking about and HPC companies, hyperscalers coming back to ordering what they typically awarded and they've gone through a slowdown as well. So they've started to recover. So it's sort of across the board really.

John Dillon -- D&B Capital. -- Analyst

And you talked about the next quarter, look like bookings are going to be up for the Advanced Products and pretty good for the Brick. What about for the next two quarters, do you see increases in bookings for the next couple of quarters?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Again, looking very far out in a sort of a turbulent time. But yeah, I mean, I am confident that the strength is going to remain with Vicor and the products that we have on both the advanced side and still see good strength on the older products, the Brick products too.

John Dillon -- D&B Capital. -- Analyst

Excellent.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So this is indicate that not just on whether we hear from customers with new applications, but on the transition that is now finally beginning to take place away from 12 into 48, it's not just into the center AI space, but in automotive. We're seeing a lot of action there too. Now unfortunately that's long gestation period, right. There is no instant gratification it's for initially work for couple of years. But if we look at the medium to long-term, if you will, pass the next couple of quarters into, let's say, the '20 -- '22, '23 timeframe, there is a lot of action that is taking place in automotive that will bolt-on to further developments in AI and data center.

John Dillon -- D&B Capital. -- Analyst

Excellent. And that kind of leads right into my last question that's, if you can give us an update on the design wins, like are they still increasing? What markets are you seeing? Are they broad based? And then finally, are you seeing any design wins for the front-end products?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Okay. So front-end products for us, at this point in time, mainly the high voltage fixed-ratio converters. So, yes, we've got lots of design-ins for those in the automotive market, some in the data center area. We also serve robotics companies, emerging robotics companies. That's a very exciting market and has got some great growth potential for us. And also UAVs, lighting, there is a whole host of markets that, John, that are fairly broad based with really large numbers of customers entering those marketplaces. So that's good strength for us. So that's on the front-end high voltage bus converters.

In terms of -- I think your other question was that -- but more toward the data center AI space or automotive space. And yeah, we've got more engagements going on pretty much every quarter there is something new that we're working on or somebody is coming to us with a challenge or an opportunity and...

John Dillon -- D&B Capital. -- Analyst

Yeah.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

This is very exciting time base...

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

In particular, a project for our 4G based PFC power system solution that is in the works now and I think will lead to what should be by far the most advanced AI solution from power system perspective. So soon to announce from three-phase AC all the way down to very high current up the point-of-load through a 48-volt system we're going to be providing the whole solution. We're currently providing the solution from 48-volt to the point-of-load, but from the next-generation system, we're going to be providing the solution from three-phase and this next-generation system is going to be a fraction of the volume of the current generation, because in part of the advances in the front-end. And I think it's going to be a game changer for the industry at large.

John Dillon -- D&B Capital. -- Analyst

This is great. And it sounds like we're finally getting the diversification that we're all looking for. This is really great. Congratulations, guys.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Thank you.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Thank you.

Operator

Thank you very much. The next question is coming from the line of Kenneth Daruana [Phonetic]. Your line is open now, please proceed.

Unidentified Participant

I actually don't have a question, because I've been unable to hear 95% of the presentation. So I just drop out of all.

Operator

I'm sorry to hear you that. As we mentioned at the beginning of the call, we are recording this conference. So you will be able to listen back and we will investigate. Sorry, Kenneth. So have you got any question or can I close your line.

Unidentified Participant

Alright. No question now.

Operator

Okay. Sorry. Thank you. So the next question is coming from Richard Shannon. Your line is open now, please proceed.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for letting me ask some questions here, as well. Kind of a follow on from one of the earlier ones and my questions are more specific to bookings within the Advanced Products. So I wanted to get a sense of whether there is a broadening of that base here. Obviously, you've got two larger customers, I think in the prior answer you're talking maybe about some HPC coming in here. But I'm particularly curious about any new hyperscalers and/or customers with OEMs that you're starting to see material bookings for.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

So, on the OEM side, we've got a lot of design-ins either 48 to 12 or fewer 48 with lateral power delivery. Those companies are bringing those products to market, but again, they are finding their own hyperscaler customers to work with. So it's early days for us to really understand the forecast and the penetration of those particular chip companies within the hyperscalers. But they tell us that they're winning share and are getting good design-in. So that's yet to come, but we're still doing really well in that area.

Also you've got the new sort of VR-14 server boards being developed by Intel and Intel's customer base and 40% of those 50% is what we are hearing is going to -- are going to go 48-volts. That's a number that's been confirmed. And in those types of applications we are providing the 48 to 12, either regulated or unregulated solutions and that market is a market that has got a number of competitors in it, but nobody has got the density, efficiency and performance that we have. So we expect to get some good design wins in the VR-14 our area, both at the hyperscaler companies who will do their own reference designs off of the Intel reference designs as well as in the CM companies down in Taiwan and China.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Okay, great. Just to follow up on that, Phil, if you listen to the OCP Summit here earlier this spring, they talked about some revenues coming from OEMs here in the second half of the year. It sounds like from your commentary you might not necessarily expect a whole lot, wanted to kind of dive into that a little bit. Is that something -- is that a fair interpretation from what you've said or do you still see some noticeable revenues this year?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

I think it'll be early next year, Richard. I don't think there'll be heavy bookings this year. We'll see some early bookings obviously in terms of how they do their early production ramps and get ready to launch. But in terms of the bigger numbers, those will come next year.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Okay, fair enough. Quick question on gross margin, a follow up from earlier and I think Patrizio you're commenting on some previous questions here about getting some maturity in the manufacturing process here, to what degree was that an impact in the second quarter? How much does that help here in the third quarter? And trying to get to the other question of how much, if any, should we see gross margins improve here in the third quarter?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So I'm not going to make a very specific prediction with respect to the amount of improvement in gross margin beyond saying that we see the gross margins continuing to expand. Obviously, they haven't been expanding recently. But we -- I believe, we've seen the bottom in this past quarter. To your earlier point, it has to do with a combination of factors as suggested earlier, scaling up volume production for new products with new packaging technology is a big factor in terms of depressing margins, capacity utilization. And last but not least, tariffs and COVID-related inefficiencies.

So going forward, these factors, at least the once that under our control should continue to fade in terms of having a negative impact on margins. We are as a company, as a management team now very much focused on seeing our margins expand to the levels of the best analog companies in the industry, which is obviously not single point advances relative to where we are, it's more like 20% or higher. We're not going to get there overnight, let's be clear. It's going to be a multi-year process, but we have a line of sight on how to accomplish that and we're very much focused on making that happen.

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Okay. We look we look forward to seeing that. Thanks, Patrizio for those thoughts. My last question, obviously, we've had some impact in past quarters from the tariffs for products shipped to China here, but you had a very nice return to business in the second quarter. My assumption is based on what I heard that you're expecting China to improve here in third quarter, but is there some lingering risk here of tariffs continue in any manner that that business is lower or even lost if the view is it will continue for lengthy period of time?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Well, I don't know that I can really comment on what might happen in terms of some further deterioration in relationships between the countries. We do have contingency plans we're not pulling the trigger on those contingency plans at this point in time, hoping that cooler heads would there, right. So we don't see -- we haven't seen particularly different or concerning issue of late. To your point, the tariffs are still there, both, coming and going, right.

We pay tariffs on materials we procure from China. The customers in China pay tariffs on products they procure from us. We are taking a constructive step in terms of diminishing our dependency from a material shortage perspective from China. I just had an update on that general strategy earlier this week, and we're going to be largely out of -- with respect to major suppliers out of China within the next year, year-and-a-half and this is an ongoing process, it's not a set function, right.

Some of it is beginning to happen, it took some time to bring it about more of it is going to happen in second half of this year, it's going to become more significant next year. Some of what is going on is working actually in concert with some of our long-standing shops base in China, opening up shop in Vietnam to in effect get around the handicap that the tariffs have imposed on their business, not just with us but with others.

So that's a part that we have pulled the trigger on and we're working very closely with key suppliers. So another example would be for components that we used to source from Japan that had moved to China because of cost reduction opportunities very soon they're going to be back in Japan because all told we can source them with lower overall costs back from Japan.

So those activities are ongoing. When it comes to making our products outside of the U.S. or making some products like bricks outside of the U.S. should a worsening of the relationship happened. We have contingency plans, but we haven't pulled the trigger on that.

Quinn Bolton -- Needham & Company -- Analyst

Okay. Appreciate the thoughts. That's all the question from me. Congratulations on great progress guys. That's all.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yes.

Operator

Thank you very much. The next question is coming from the line of Alan Hicks. Your line is open now Alan, please proceed.

Alan Hicks -- Ainsley Capital Management -- Analyst

Yeah, good afternoon. And I want to ask about some of the projects, large LED project and satellite project have those shipped?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So the satellite would be going up -- that's one of the projects that got slightly delayed, but I think we're going to be shipping product in Q3 and more product in Q4.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. And large LED project that you had?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So as you can imagine that's another one of those were because of COVID, right, and things coming to switching old, where the installation has take place for a number of months things got delayed. But once again, we are not lacking bookings or backlog, so we have plenty to draw from in terms of raising revenue levels from quarter-to-quarter and we'll be ready to ship those programs and those products as the impact of COVID gets behind us.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. So those are still to come?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. And on supercomputing, you expecting that to ramp this year? How is that progressing?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

That's going very well. There has been a lot of consolidation there, of course, with HP buying Cray and so forth, but we're making good progress. We've got both front-end business there as well as the point-of-load, as well as both on the CPU side as well as the AI GPUs as well. So that's going very well. That's a classic 48-volt market that market transitioned a while ago. So it's a great market for us and we're making good progress there too.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. So you had good shipments there in Q2?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Shipments will be, yeah, increasing as we're going through Q3 and Q4, that -- those programs are a little bit longer in terms of -- they're government programs and they're very high-end sort of programs. So the shipments will really begin in Q3, Q4.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. And then can you give an update on your newer front-end products, is that progressing as planned?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yes. So as always, these things ends up always taking longer than we like, but we have now everything we need. As I mentioned earlier, we are engaged with one of our key lead customers on a program that will bring about a much smaller, much more powerful machine, many sensor kilowatts of AI in one box is going to be a game changer in the industry and one that will leverage our 4G PR and PFC technology it's very novel in many aspects, very dense, very efficient, very flexible.

Alan Hicks -- Ainsley Capital Management -- Analyst

Thanks. So that's still maybe a way for any contribution?

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Well, in terms of moving the needle on the revenue front, I would say probably even more than a year away, but I think in terms of initial power production less than a year away.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. And then someone mentioned about opportunities on the edge. How significant are your opportunities there?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Again, that's a developing market for us because, again, we're looking at power levels and current levels increasing on those types of processes. So that's a market that -- I think, we'll probably be participating in again, sort of a 2022 type of timeframe for that.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay. That -- how significant will the opportunity be?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Well, that's a very -- that's going to be a very large market, right? If you look at the number of processes and inference versus training you're looking at maybe 5 times in terms of the quantity of processes that will go there. So that's a significant market expansion that will come when you see the autonomous vehicles out there and other robotic type delivery system. So that whole infrastructure has to get built out. So...

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So I was with our engineer over for dinner less night, he went back today, and he is going to be in 14-day, what do you call it.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Isolation.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Isolation, quarantine, working on a vehicle to deliver to homes with AI chips and a variety of perception type challenges. Wherever I turn, I see these kinds of opportunities right, it's going to be I think a very significant area of opportunity, a lot of these things for instance this particular company is still in the phase of early development.

And for sure, not all of them are going to make it, they have come to it to the likes of Amazon, but again, wherever we turn, we see more and more opportunities for AI in a variety of forms. It's almost adding in particular.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Yeah. Take a look at our new robotics video on our website that's pretty cool, that will show you some of the areas that we're getting into.

Alan Hicks -- Ainsley Capital Management -- Analyst

Okay, great. Congratulations on a great quarter. Thank you.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Thank you very much. The next question is coming from the line of John Dillon. John, your line is open now.

John Dillon -- D&B Capital. -- Analyst

Hi. Thanks again, for taking my call or my questions. I think you answered this already Patrizio, but I just want to make sure I got it right. It was on gross margins and I think what I heard was you think you saw the bottom on gross margins last quarter and you expect increases in the next two quarters, but it's going to take a while to get to the gross margins that you really expect and that's maybe 20 points higher, but that's down the road. Is that a fair assessment?

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Yeah.

John Dillon -- D&B Capital. -- Analyst

Excellent.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

So, I mean, obviously there is going to -- nothing is ever is straight line, right? But I think the trend should be a positive trend with a timescale of a few years to get to where our margins belong given the level of technologies investment the intellectual property, the patterns, the unique capabilities that we have. Being well above any competitor in the industry.

John Dillon -- D&B Capital. -- Analyst

Excellent. And it's something you mentioned deferred revenues, could you talk about that a little bit?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Sorry, what was that, John?

John Dillon -- D&B Capital. -- Analyst

Did somebody mentioned deferred revenues, Jamie, did you mentioned that?

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

I don't recall mentioning it, but it's obviously tied to a lot of our development projects where we book both deferred revenue and deferred cost and then when we can recognize it under GAAP, we do so. And it's a recurring...

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Yeah, we have projects where the work might be done. The voice that been sent, it might even have been paid for, but we can't tell you recognize it. We got some...

John Dillon -- D&B Capital. -- Analyst

How much deferred revenue do you have?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

I am not sure that we can get into specifics about that. But...

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

There are accounts on the balance sheet you can see them, it's clearly presented.

John Dillon -- D&B Capital. -- Analyst

Excellent. Thank you. Thank you very much and again congratulations.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

So, operator, do we have one more question?

Operator

Yes, we actually -- we have the last question and is coming again from Quinn Bolton. Your line is open now.

Quinn Bolton -- Needham & Company -- Analyst

Hey. Just wanted to follow up on a -- just a question, so you made the comment that on the VR-14 boards you thought that perhaps 40% to 50% of those boards might be 48-volt, given the great opportunity for the 48 to 12 NBM product. I'm just kind of curious -- I mean, is that true beyond your large hyperscale motherboard customer today? I mean, do you see most of the hyperscalers moving to 48-volt with the VR-14 boards?

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

The data that we've seen is that over 40% of server blade developers are moving to 48-volts that's what they're moving to for VR-14 and other types of processor CPU boards, not just from Intel but AMD as well. And then if you look at the -- sorry, if you look at the VR-14 just to jump back a little bit here and explain. So the VR-14 boards, if they've got no AI capability at all, they're still dual processor, but they dissipate today about 1,500 watts, right. Once you start adding AI in there they go through about 3 kilowatt. So you get to the point where you really can't have a 12 volt infrastructure and put many of those blades in a rack. So you have to make the jump to 48-volt, so the server developers are moving there.

And if you look at the hyperscalers the estimate right now is 25% of the worldwide hyperscaler companies, including China, Europe and North America, whatever. About 25% of them are putting in place 48-volt data centers. So that's big numbers compared to right where we were two or three years ago. So for Vicor the opportunity is, the 48 to 12 where the current levels Patrizio mentioned earlier, the sweet spot being 400, 400 amps and up, but some of those CPUs are still 250, 300 amps multi-phase is OK, but they're 48 volt infrastructure now opportunities for us with NBMs, but also regulated NBMs, which we call a DCM. So there is opportunities there for us in that general server blade cloud search type of application. That's going to be quite...

Quinn Bolton -- Needham & Company -- Analyst

Thanks for the additional info. Great, thank you.

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Yeah. And that is additional to what we've been talking about which is a big AI story, right, that's what we've been talking -- spending a lot of time talking about the last few months.

Quinn Bolton -- Needham & Company -- Analyst

Right, right. No, that's great.

Operator

Thank you very much.

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Thank you very much,

Operator

There are no more questions.

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Very well. Talk to you in a few months. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

James A. Simms -- Corporate Vice President, Chief Financial Officer, Treasurer, and Secretary

Patrizio Vinciarelli -- Chairman of the Board, President and Chief Executive Officer

Philip D. Davies -- Corporate Vice President, Global Sales and Marketing

Jonathan E. Tanwanteng -- CJS Securities, Inc -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

John Dillon -- D&B Capital. -- Analyst

Unidentified Participant

Richard Shannon -- Craig-Hallum Capital Group -- Analyst

Alan Hicks -- Ainsley Capital Management -- Analyst

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