Vicor Corporation (VICR) Earnings Call Transcript & Summary

Good day, and welcome, everyone, to the Vicor Earnings Results for the Fourth Quarter and Year ended December 31, 2021. My name is Robin, I'd be the operator today. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now I would like to hand the call over to Jim Schmidt, Chief Financial Officer. Please proceed, sir.

Thank you, and good afternoon, and welcome to Vicor Corporation's earnings call for the fourth quarter and year ended December 31, 2021. I'm Jim Schmidt, Chief Financial Officer, and I am in Andover with Patrizio Vinciarelli, Chief Executive Officer; 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 3 months and year ending December 31. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements and our capacity expansion as well as management's expectations for sales growth, spending and profitability are forward-looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2020 Form 10-K, which we filed with the SEC on March 1, 2021. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Thursday, February 24, 2022. 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 March 11, 2022. The replay dial-in number is (888) 286-8010, followed by the passcode 63075291. This dial-in and passcode also are set forth in today's press release. In addition, a webcast replay of today's call, along with the transcript will be available shortly on the Investor Relations page of our website. I'll now turn to a review of our Q4 and full year financial performance, after which Phil will review recent market developments, and Patrizio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly change for P&L and balance sheet items as well as full year-on-year changes and refer you to our press release or our upcoming Form 10-K for additional information. As stated in today's press release, Vicor recorded total revenue for the fourth quarter of $90.3 million, up 6.3% from the third quarter total of $84.9 million. Revenues for the year ended December 31, 2021, increased 21.2% to $359.4 million from $296.6 million for the prior year. Advanced products revenue rose 18.2% sequentially, while brick products revenue declined 6.2% from the third quarter. Revenues for advanced products for the year ending 2021 increased 60.1% to $170 million -- $170.2 million from $106.3 million the year before. Shipments to stocking distributors increased 4.2% sequentially and 67.4% year-over-year, with year-over-year increases for both advanced and brick products. Exports for the fourth quarter increased sequentially as a percentage of total revenue to approximately 71.7% from the prior quarter's 62.4% primarily due to increases in advanced products. On a year-over-year basis, exports increased as a percentage of total revenue to approximately 67% from the prior year's 64.4%. For Q4, advanced product share of total revenue increased to 56.9% compared to 51.2% for the third quarter, with brick product share correspondingly decreasing to 43.1% of total revenue. Turning to Q4 gross margin. We recorded a consolidated gross profit margin of 45.2%. For the full year 2021, gross margin improved to 49.6% from 44.3% in the prior year. While margins remain under the pressure of high tariff charges, the Q4 charge did decrease by approximately 7.1% compared to Q3 to approximately $1.8 million. We continue to expect to see improvement over time in part reflecting our ongoing efforts to reduce component imports from China. I'll now turn to Q4 operating expenses. Total operating expense increased 3.5% from the third quarter, driven by increased compensation, legal and business development expense. For the full year 2021, total operating expense as a percent of revenue declined to 34.1% from 38.5% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods sold, SG&A and R&D was $261,000, $1.207 million and $562,000, respectively, totaling approximately $2 million. For Q4, we recorded operating income of $8.9 million, representing an operating margin of 9.9%. For the full year 2021, operating income totaled $55.6 million or 15.5% of revenue compared to $17.4 million or 5.9% of revenue in the prior year. Turning to income taxes. We recorded a tax provision for Q4 of $206,000, representing an effective tax rate for the quarter of 2.3%. The tax provision for the full year 2021 was $176,000, representing an effective tax rate for the year of 0.3%. This was primarily due to a result of the income tax accounting required for stock options exercised during those periods. Net income for Q4 totaled $8.9 million. GAAP diluted earnings per share was $0.20 based on a fully diluted share count of 45,148,000 shares. For the full year 2021, net income increased to $56.6 million, up from $17.9 million in the prior year. In 2021, fully diluted earnings per share more than tripled from the prior year, increasing to $1.26 from $0.41 in the prior year. Before I turn to our financial position, just a brief update about COVID-19 and our workforce. As previously discussed as a designated essential manufacturer using masks and practicing social distancing from the onset of the pandemic, we have continuously operated 3 shifts at our Andover manufacturing facility. Cases and absenteeism due to COVID-19 are now negligible. Nevertheless, because much of the potential influence of the COVID-19 pandemic is associated with risks outside of our control, we cannot estimate the extent of such influence under financial or operational performance or when such influence might occur. Turning to our cash flow and balance sheet. Cash, cash equivalents and short-term investments totaled $227.6 million at Q4. Accounts receivable net of reserves totaled $55.1 million at quarter end, with DSOs for trade receivables basically steady at 41 days. All balances are current. Inventories net of reserves increased 6.2% sequentially to $67.3 million. Annualized turns remained unchanged at 2.9. Operating cash flow totaled $14.2 million for the quarter. Capital expenditures for Q4 totaled $16.8 million. We ended the quarter with a construction in progress balance of approximately $36 million, leaving approximately $35 million scheduled to be spent through the year, primarily for manufacturing equipment. Our factory expansion project is proceeding on schedule and on budget. And on January 27, we received certificate of occupancy. I'll now address bookings and backlog. Q4 book-to-bill came in well above 1 and with 1-year backlog increasing 17% from the immediately prior quarter and up more than twofold from the same period last year. Turning to the first quarter of 2022. Our practice continues to be not to provide specific quarterly targets. Our focus is directed at bringing our in-house production online in the coming months so that we can fully support the customer base that is driving demand for our products. We continue to work on improvements and product level profitability. Further, we do not anticipate any meaningful increases in operating expenses, while substantial further improvements in gross margin, we'll have to await production from our new vertically integrated factory, we expect incremental revenue to drive earnings per share given the scalability of our operating model. With that, Phil will provide an overview of recent market developments, and then Patrizio, Phil and I will take your questions. [Operator Instructions] Phil?

Thank you, Jim. Q4 was once again characterized by strong bookings for advanced products with high-performance computing customers and with anticipated lower legacy product bookings. Orders for legacy products in regions other than China remains strong. On the advanced products front, the strong bookings growth trajectory for a high-performance computing business is expected to continue with both increased demand from major customers and new opportunities and designing activity continuing at both existing and new customers. Established OEMs and several well-known and well-funded AI start-up companies having introduced initial relatively low current AI platforms and now planning AI ASICs with currents approaching 1,000 amps and have turned to Vicor's lateral and lateral vertical power solutions. Our customer portfolio in high-performance computing continues to grow, and we are already in new Generation 5 technologies in controlled silicon and components to continue our advances in power density, current density, efficiency and transient response, which is critical -- which are all critical to high-performance AI applications. Our Gen 5 point-of-load products incorporating several major performance advances will be introduced in Q3 this year to early lead customers. The demand for high-density power delivery solutions continues unabated across all of our target markets with power systems engineers turning to Vicor's modular power solutions to solve their toughest design challenges. Our work in the past 3 years in the broad industrial marketplace to find new growth applications is beginning to pay off. Due to the rapid electrification and autonomy trends within both existing and emerging industrial markets, we have identified an additional $2.5 billion of available market in the next 5 years across market segments such as light electric vehicles, robotics, battery test equipment and UAVs. Our opportunity pipeline currently stands for $250 million for these new high-growth applications. Our automotive business development success in 2021 confirmed our confidence that the automotive market presents a significant growth opportunity for Vicor power modules and our place as a major future supplier of power modules to the automobile and truck industry. Our directed supplier strategy with leading OEMs has been very successful with 3 production design wins and now 10 collaboration projects with major OEMs on technology and power module-based system evaluations. Our aerospace, sorry, and defense business strategy is undergoing a refocusing on 4 key growth markets. In one of these markets, satellite communications, we have made advances with new customers, and our opportunity pipeline outside of our lead customer Boeing is beginning to grow. We are excited for what lies ahead of us in 2022 and beyond, given the major dislocations occurring in numerous large end markets, as system power levels increase and electrification and autonomy drive the demand for higher performance power delivery networks. Major customers across our target markets clearly see the significant benefits of moving to higher voltages and away from discrete-based custom power system solutions and towards high-density modular power solutions from Vicor. Key to maximizing our growth opportunity will be achieving and maintaining operational excellence across our entire company. Initiatives launched in Q2 of last year are now well underway with multiple cross-functional teams focusing on 7 pillars of continuous improvement, ranging from customer centricity to talent retention and acquisition. Our commitment to vertical integration of our manufacturing processes and expanding our American base of operations is also a key success factor to achieving operational excellence. As Jim noted earlier in his prepared remarks, our new facility is approaching completion and will be operational in Q3 of this year with a ribbon-cutting opening ceremony on April 26. That concludes my remarks. And Patrizio, Jim and I will now take your questions.

Okay. Operator, we're ready for questions now.

[Operator Instructions] The first one is coming from the line of [ John Dillon. ]

Congratulations on the bookings, they look really good. Patrizio, I did have a question on the new factory. I was kind of -- I thought kind of that production would be starting this quarter. Can you give us a little more color on what's happening with the new factory?

Yes. So regarding start of production in the new wing, we're actually expecting next week to start production on a new line with the capacity of 1 panel, which is a large multi modules per minute. That's a portion of the expansion with a shorter cycle time to fruition than other portions to do more with the package technology that is key to vertical integration. So that equipment, actually, the 3 of us feel, Jim and I gave the 2 of it on Tuesday of this week. A better equipment is partly in place. There are 2 cranes were there on Tuesday, lifting additional equipment is getting installed. We have tens of millions of those equipment that is going in and it's going to start going through qualification runs later this quarter and to next quarter and some of the process steps are going to be operational in the second quarter. But to be clear, as suggested by Jim earlier, for full vertical integration, we're looking at the month of July.

Got you. So we'll still see some increase in production then for the next couple of quarters, I would imagine?

Well, in certain areas, we are looking at a significant increase in production, again, starting next week. With respect to some of the process steps involved in the chip or converted host in package technology, we're going to have access to some of the process steps starting in Q2. But again, for complete system packaging, it will be in July.

Got you. But I mean for total revenue -- go ahead. For total revenue for Vicor, though, can we expect to see revenues starting to increase quarter after quarter? I mean, I would imagine -- I mean, I guess, really what I'm asking is the supplies chain constraints, along with the additional new factory, will we see the revenue start increasing or continued increase, I should say?

So let's start with Q4. So Q4 was frustrating is that while we did achieve a significant increase in throughput, particularly with respect to advanced products. I think as mentioned earlier, it was about 18% sequential from the third quarter that still fell short of expectations for a combination of reasons, some linear challenges on the component of our body side as well as significant challenges with respect to some of the package process steps that are still outsourced. Now we brought up another partner as an interim stepping stone for additional capacity and thus provided some relief within the last month. But as suggested in the prepared remarks, we're really counting the days at this point to the other part of the second quarter and for full integration at the beginning of Q3 to be in the control of testing that we need to have in order to have the lower predictability that we expect. Unfortunately, that predictability wasn't there in Q4. And just to be clear, the lower predictability isn't going to be there in this quarter. I think the access to additional capacity with respect to some of the process steps gives our operations team more flexibility with respect to getting their job done. But it's been very challenging for them, again, both because of the very tight supply chain, the challenges with respect to our source processes. And just to get a little bit of quantitating with respect to that, not just in terms of throughput but also the impact on margins. In Q4, we were confronted with out-of-blue 5x price increase on some of these process steps. So it's been a very difficult environment. And again, we are eager to get through the completion of the selection of the equipment, which is progressing well and then getting the benefit of adding a tall control of our destiny once all the equipment is ready for fabrication.

Got you. So from all that, can I -- can we get any kind of feel for -- I mean, you did about -- you did a little over $90 million in revenue this -- in the fourth quarter. Will we see a step up in the first quarter and second quarter?

So I internally show given that in Q4, we fell short of our target, even though earlier in the quarter, we thought we were going to make a higher step up particularly in advanced product revenues. We believe that until we are in control of our destiny to provide guidance with respect to the level of improvement sequentially in revenues would set up for surprises, one way or the other. And so we're just going to stick to keeping it a TBD. Needless to say, we got a lot of backlog, we got a lot of customers looking for more allocation on key products. And you can be sure that our reversions team is working extremely hard to bring it all about even before we get into the lower control of test that we need to have.

Got you. I completely understand that. But we're pretty far into Q1 already.

Yes. We're not -- as I said earlier in the call, this is Jim here. We're just not going to offer specific guidance. I think what we've included really need to have control over our own destiny, and we're -- you could call it months, you could call it weeks away from having that visibility and having that sense of control.

Yes. And is not that function, right? We are getting in greater control of our destiny. And going back to the component availability issues, particularly on the semiconductor front, we made progress. We got bigger allocation. But that landscape is still full of mines. As an example, late last year, we got notified random life on certain components and then the vendor did an honor last time buy. So we are dealing with a lot complexities supply chain that make predictability harder aside from the lack of vertical integration in the manufacturing process.

The next question is coming from the line of [ Quinn Bolton. ]

Just wanted to sort of follow up on John's line of questioning. And I guess my key question is you mentioned some component constraints and then obviously some limitations on your outsourced electroplating step. Was the entirety of the miss really due to the outsourced manufacturing step? Or is it shared with component challenges still? Because it sounds like you'll bring that manufacturing step online or vertically integrate it beginning July, but I'm trying to get a sense how much risk is there still on component availability issues? It sounds like you're making progress. So maybe that wasn't a bottleneck.

So Quinn, there was progress and the wafer outs have been increasing. But I think as we've discussed in the past, there is latency between wafer outs and components in tape or real ready for assembly. And by the way, there are too, we've taken the initiative of investing in additional facility in Rhode Island to provide virtual integration with respect to the back end. So it's a combination of factors. The component of all the issues were not as significant, but were still present. And they, as you heard me say in the past, get compounded by in effect adequate capacity in the outsourced packaging process steps because if as we say pits or particular jobs can be started on time due to any one component not being available, the opportunity to make that up if you get constraints in the packaging process steps is impaired by those constraints. So these low interdependencies, and we still got some work to the level of predictability we expect we're going to have once the latency associated with a substantial step-up in wafer outs runs these cars, which is taking place this quarter. And we get at least a good traction of the packaging process steps under our belt.

Understood. And Patrizio, you had mentioned that the reason for the gross margin pressure, it sounds like primarily in Q4 was sort of a 5x increase in some process steps. And am I right to think that those are the outsourced process steps, where you've had to bring on a second supplier, but perhaps more importantly, those are the process steps that you will bring in-house beginning July with vertical integration?

You're correct. So fundamentally, we had to do what we were forced to do in order to take care of our customers. And the priority was to get the capacity that was essential to have without regard to the cost issue for the short term, knowing that that's before too long going to be behind us in our rearview mirror. So the priority is to get as much capacity as we can and not worry about the short-term impact on margin.

Understood. And it was my last question, sorry for asking a third, but I think it's important. Do you feel like any of your customers have been -- that you've left them short to such a point where they may look to try to find alternative sources to Vicor? Or do you think some of the steps you've taken paying the higher prices for the process steps that you're satisfying their critical demands? And obviously, as you ramp Andover, you'll be able to supply more of their demand?

So Quinn, this is Phil. So I think with the major customers that we have, we're obviously in very, very close communication with them almost daily, planning shipments to them and to their contract manufacturers with a very integrate set of eyes on that task as it were. So they are very, very aware with the steps that we're taking. And we're not surprising them at all. There's no surprises in terms of what we're doing, that we're very intricately involved in their planning and supporting them. But to the future, what we're seeing is that in the AI market, particularly high-performance computing, the demand profiles, they are significantly increasing over the next year to 3 years. What we're seeing is a big shift in the market of the hyperscale is actually buying in solutions that would embed in racks that they already have and then having a very much higher compute density within the power profile that they have for their data centers, which is pretty much fixed. So the demand is going significantly up with a lot of our end customers to service that need. And so, yes, I think that a number of these customers are going to be looking for second sources, but Vicor, I can assure you, is going to play a big role in servicing that demand still. We've got close partnerships with these companies developed over many years. They need our solutions. They need our performance. So I'm confident that we will stay with them, stay on track to meet our commitments that we do make. And then as Patrizio mentioned, ramp-up in the second half of this year with a step-up in delivery and be able to meet the demand that we are planning with them for next year and beyond. So I'm very confident in that, as I mentioned in my prepared remarks.

The next question is coming from the line of [ James Liberman. ]

So it was a pleasure listening into the progress you're making. Could you make some comments on the developments regarding licensing and also and how the AC-DC converter market opportunities open up to you? And what kind of color you could give to us in your participation in that area?

So we're having discussions with multiplicity of licensees or potential licensees. And as discussed in the past, these are developments with a relatively long gestation period. So we don't have anything to say today. And when we are -- we'll go public with it. But the less is the opportunity in a variety of end markets for our brand portfolio and technology are very substantial. And I think, as discussed in the past, it's the reason of this fact that they're going to make a significant contribution to the margins to the bottom line and to a significant degree also to revenue as a whole. But I think we need to be passionate with respect to making the right engagements on these fronts. And making most of the opportunity with respect to picking the right partners in each of the key end markets.

Got it. That makes sense, absolutely. And can you comment on the AC-DC opportunities for you down the road?

We have very significant opportunities as we speak. I think that beyond the customers that we referenced in the past, installations that are beginning now, we have a broader market opportunity for high-density liquid cool AC-DC products that we are pursuing, and this is to in effect, enable solutions with very, very high density in racks and other systems, which more and more require liquid cool content at a cost point that makes them generally attractive, while providing us with a strong margin opportunity. So those are derivative products that are currently in advanced development that represent in effect, low hanging fruits as a follow-on to the effort that has already been completed. They use the same building blocks that have been proven to perform to the level of power density efficiency and ease of thermal management that we've demonstrated with our lead customers.

The next question is coming from the line of [ John Dillon. ]

Patrizio, on your vertical power delivery system, I'm just wondering how comprehensive your patent protection is? And specifically, I was wondering if someone delivers power from underneath like you do, is that either a licensing or product sale from Vicor? Is your patent protection good enough that you can protect anyone from doing underneath? Or is it just your whole solution that's patented?

So for obvious reasons, I'm not going to give you a very detailed answer to your question. Suffice it to say that the innovation that we brought about with our VPD initiative is effectively protected by multiplicity of balance. Some become a public domain, other ones are not yet. But as you know, we take with your care ensuring that our innovation intellectual property are effectively protected. And I think it's fair to assume that anybody is taking chances with respect to following our tracks on VPD technology, and as you might have heard me say in the past, is stepping on a mine field, and that's not an advisable course of action.

Right. Got you. And then, Phil, I was in Vegas and I saw these LED signs and I thought of Vicor. I'm just wondering how big of a market that is compared to the data center? And if you could rate like point a load in the data center, high-performance computing and then maybe front-end products and then LED lighting, can you give me a sense of how they relate to each other, the size of each of them?

Yes. I think it's safe to say that the whole data center opportunity for AC-DC and even DC point of load is massive compared to the LED market. I mean the LED market, display market, particularly, which are the big high-performance displays is a very good market for us on the broad industrial front. We're involved with one big installation there in Vegas. And there may be others to follow. They're talking about London and other places for those types of entertainment domes. So I think we'll be participating that. That will be part of our broad industrial portfolio. But I estimate the -- maybe the available market there to be in the range of about maybe $100 million, $150 million, somewhere around there.

Got you. I figured it'd be limited, but it was interesting. Looking forward to the progress next quarter.

Yes. So let me make an additional comment regarding that. The opportunity there, even though incrementally, is relatively small relative to AI and data centers. It's an opportunity that leverages the same building blocks that we develop for AI and data center. So we have a big unicorn in the center space, AI with liquid cool PSU on the one hand. And remarkably, the same modules that provide the key functionality within that solution are deployed exactly the same model in the lighting -- on lighting application of 10 megawatts. So it's a different scale in terms of our power requirements, different kinds of environment. But the synergy of our modular power system methodology and IP is such that, in fact, we can incrementally pursue this diverse market opportunity, reusing the same building blocks, and that's very unique to our environment.

Yes. It sounds like you can scale to different markets very easily with very little engineering, and that's a real benefit for a lot of people out there, people outside the data center. Am I hearing that? Yes. Great Okay. And that sounds great.

Yes.

The next question is coming from the line of [ Jon Tanwanteng. ]

I was wondering if you could give us a little bit more color regarding the bottlenecks at your outsourced plating partner. It had been COVID in prior quarters, is there something new going on now? And what is happening to, I guess, improve the throughput there as we go through the next couple of quarters before you ramp up your vertical integration?

Yes. So I'm not sure I can give you a lot more color on that other than to say that it's been very frustrating in many respects. And again, as I said earlier, we're literally counting today slab to be in control of our destiny. So we've been able to get incremental capacity a month after month and quarter after quarter, but not to the scale that would have been necessary in order to expand the volume of advanced products as would have been necessary to fully support the demand from customers. So we are not hopeful that anything dramatic in terms of incremental improvements with outsourcing can be made up in the few months last to the turn on of a fully integrated capacity of our own. We have brought on a second partner. But frankly, there are limitations with both of these partners with respect to what they can do and the degree which we can predictably rely on that effort. So it's got its ups and downs from week to week, and it really makes our life very complicated in this remaining time frame between essentially the middle of Q1 and the end of Q2. Even though, as I mentioned earlier, as some of the equipment gets turned down, the number of process steps for which we've been relying on these outsources will be going down, and that gives our operational team more latitude, more flexibility with respect to getting that drop down.

Got it. And then you mentioned a surprise price increase at one of your outsourced partners. But are you seeing other general inflationary pressures, first of all? And second, are you able to pass those on in any way shape or form through pricing? I know you said you didn't want to pass on this big surprise one. But just in other terms, in other places, everyone's raising prices. I'm wondering if you're able to get some of the same tailwind behind you in terms of pricing?

So I'll address the first part of your question regarding the food chain upstream of us and Phil will take the second part regarding our customers. So with respect to process steps, we had -- we were jilted by a 5x out of the blue. There was a big impact in many ways. That's the very theme example of the kind of challenge that we've been seeing over the last year. I think they are more down to earth maintain examples that become routine, particularly in the semiconductor area with increases of the order of 15%, 20%, 25%. Not at the level of the same case I was referencing earlier. These pressures are going to stay with us for the foreseeable future when this phase in the industry comes to an end is still a TBD. I've heard expectations that things could begin to turn around. As we all know, some of that industry has got basis followed by bus as more fabs come online very forecast that could happen as early as the end of this year. But then again, geographical events could get in the way of that. So Phil, on...

Yes. On the pricing front, Jon, we -- actually, pretty much every year, we take a look at our legacy products, our advanced products and strategically price increase certain families and through different channels and things like that. So we just recently completed one that will help us certainly with any increases in cost of components from our side. That was wide-ranging right across legacy and advanced ranging from 5%, 15%, somewhere in that range. And we've even done some price increases with some of our very big customers in the last couple of years as well. And they understand that. They understand the challenges, and they want us to obviously be a good supplier to them, and they understand that helping us with our profitability is important for the long haul. So they've been very collaborative partners with us as well. So yes, we've been doing that.

The next question is coming from the line of [ Richard Shannon. ]

Jim, maybe a quick 2-parter for you. Do you have any 10% customers for 2021? And can you quote the lead times that you had exiting the fourth quarter or at least compare them to what it was the quarter before?

The lead time that we're quoting is still consistent with what we had said previously. I think 32 weeks -- 20 weeks like -- advanced products in 26, I think, on the brick products. Yes. So it's still lengthy, but it is the case that with the brick products, we generally have a bit more ability to deal with turns business and capture turns business.

Subject to component availability.

Subject to component availability, but without generally the outsourced constraint that we've talked about. And I think that it's probably -- I don't know that it's the case that we have a routinely 10% customer to that question. Are you talking about in terms of revenue or...

Yes.

Yes. We have distributors that are 10% customers, and we have some...

And a couple of large OEMs.

A couple of large OEMs, yes.

Okay. Fair enough. And let me ask a follow-up question here on the automotive space. Phil, I think you said you mentioned you have 3 design wins. I think that's one more than last quarter here, along with 10 collaborations. I can't remember how many you had before on that one. Maybe you can give us a sense of dynamics there? And maybe if you can touch on applications within the automotive architecture that you're focused on where you're having success?

Yes. So the collaborations have increased by 4% to 5% in the quarter, Q4. 2021 was outstanding in terms of building the pipeline. It's over $1 billion now. So significant opportunity. It's about converting now those opportunities into design wins, starter production dates, and we're working really hard to do that over the next couple of quarters. In terms of where we're playing, we play in the charging 800, 400-volt onboard charging systems. We have a significant power density over competing sort of discrete-based solutions, several box solutions, almost 10x, smaller, much, much higher efficiency. So we're getting a lot of interest there and collaborative interest in developing some early prototype systems for evaluation. And then we're playing in the classic 800-volt down to 48 to 12 and then 400-volt down to 48 to 12, working with several lead OEMs on battery delete projects, either the 12-volt battery or even the 48-volt battery, getting rid of it, which saves cost and weight and increases range. So yes, it's right across that charging and down conversion. I would call it in several large OEMs around the world.

The next question is coming from the line of [ Alan Hicks. ]

In the area of high performance and supercomputing, I know this can be very large orders, like $10 million up and upwards. Is that -- have you been able to deliver on some of those big orders? Or is that the reason your backlog has risen so dramatically?

So we've had a steady ramp through the different quarters of last year. We've -- as Patrizio mentioned, we've increased delivery on some of our larger power modules, what we call NBMs to 48 to 12, 12- to 48-volt bridging applications. Those have steadily increased -- but we certainly have to go to the next level of ramp, as we've talked about, we're going to need our new factory to come online. Patrizio talked about some of the early equipment that's going to help us do some of that. But in terms of getting fully integrated, that's what we really need to ramp up production in the second half of this year. But we are increasing -- we have been increasing shipments to our lead customers there quarter-on-quarter.

So take as an example, Q4, right? It fell short of our target and expectation. But when it comes to advanced products, it was still 18% ahead of the prior quarter. And even for the prior quarter, was unfortunately also a disappointment. Debt too was double-digit sequential increase in advanced product shipments relative to the quarter before. And the same comment would apply to debt. So it has been compounded at 15% to 20% per quarter sequentially. To get it to higher rates, we can't be relying on unpredictable support from partners with capacity, which is really not -- wasn't designed to support our specific needs. It was really architected to support general marketing. So it's not really in every respect the right infrastructure for our unique package technology needs.

So in the supercomputing area, is it across the board? Or is it more -- can you say some of these very large orders from supercomputing around the backlog? Or is that data center across the board?

Yes. It ranges from, as I mentioned, hyperscaler integration of 48-volt AI systems that they purchase to 48 to 12 in new server blade with new CPU products to AI accelerated cards to AI pads and server blade systems. So it is right across the board. And even into sort of the more government military type of supercomputers, we're ramping our business there as well. So we've got a very good footprint in the high-performance compute industry, and it is across many customers now and many different types of applications.

Okay. Then could you just comment on -- you mentioned fifth generation technology coming out in the third quarter. Is that -- what opportunity is that going to provide for you beyond what you have now?

So we are very, very excited about that because it will raise the bar significantly relative to the key figures are met of our existing point-of-view solution for AI and the center type applications. In one measure, which is effective switching frequency and the trans response time, it's a threefold step-up in performance. It's a significant step up in terms of condensity, power density and scalability as well as cost effectiveness. So our fifth-generation control system has been under development for some time. We recently gathered a key component of this nature action point-of-load solution. At the wafer level, it looked great. We're waiting within about 10 days, getting parts in type of real that we can deploy on some of the platforms of the 5G platforms being ready to accept these devices. We will be characterizing this national action solutions slowly starting in 2 or 3 weeks. And we have a complement of 5G controllers, some that are stepping out in the next 2 weeks, some other ones that are a few weeks behind them, but -- and display in a complementary way in different applications, some of them support solutions for automotive. As an example, with our 5G technology, we got full by direction of control of the power system. But fundamentally, no incremental cost, no incremental component count. And that's a key feature for some of the automotive solutions that Phil was referencing earlier. All this is accomplished in a fraction of the silicon area. So we're achieving essentially a 2x increase in the control system density. And with that, even that the cost of silicon is first order dependent on area, towards reduction in cost, subject to what is happening with respect to cost trends when it comes to wafers, right, which is under the current environment, adding higher. But negating that impact, the impact of shortages within the industry and price pressures within the industry as we get to our 5G system, we're going to have a major cost reduction and a significant density improvement, owing to the further innovation is built within our national action control activation.

So the new factory would be able to handle this new technology?

The new factory can handle the technology?

Oh yes. Yes. So this is -- so the same packaging technology that we developed with our 4G solutions, a case of without any novelty in terms of packaging technology as we deploy the next generation of silicon. And this is sort of plug and play, right? So the component that I was referencing earlier, which has been characterized at the wafer level is about to be characterized in actual national action platforms, that's an opportunity to raise the bar on performance and cost effectiveness stepping apart from some of the new controllers that are becoming available as the year progresses. And again, some of these is for data center and AI, other innovation related to automotive-type applications.

So that's part of the reason you expect gross margins to improve substantially after you get the factory up and clean?

Yes. So again, we are frustrated and disappointed with what we had to do in Q4. It was certainly not respected without that. But it has to be that way in order to get the increase in advanced product volumes that we managed to realize in the fourth quarter. But I would fully expect that with this kind of a hiccup, the trend with respect to margins remains very positive, and we should see a significant improvement this quarter and the quarter after that. And again, once we get in total control our destiny, and we leverage the economies and the scale of a new facility with $1 billion yearly revenue capability, the fundamental working of the business model when it comes to improving margins and improving bottom line, I think they are going to be unleashed.

And I think with that, we should take maybe just one more question, please, operator?

All right. The next question is coming from the line of [ Jon Tanwanteng. ]

I was just wondering when the factory -- the new facility does come online? How quickly can you catch up on the backlog that I can think maybe you just been the revenue been leaving on the table because of the supply chain and capacity issues? Is it going to be a matter of quarters? Or will it take some time to ramp up that capacity to something we can quickly catch up on that?

Well, so the step functions don't happen in the real world when it comes to these capabilities. We're going to be walking before we run. But the new factory, as you heard me say in the past, is the capacity for over $1 billion per year worth of revenues, essentially all advanced products, and obviously, that level of capacity would enable us to catch up with the backlog relatively quickly. But I think we're not yet at the point where we can make a statement as to the rate of progress. I think it is fair to say that as I suggested earlier, to the extent in spite of all of the challenges, the upcycle of course, the versions team has had to run through over the last several quarters, they have been able to deliver, if we look at the glass half full, again, 15% to 20% sequential advanced product unit growth. I think that number comes to third quarter should begin to take a significant step up.

Thanks very much. So operator, I think we are ready to conclude the call.

All right. Thank you. In that case, everyone, thank you very much for joining this conference call, and have a nice day.

Thank you.

Bye-bye.