Vicor's New Proprietary Products Will Drive Revenue And Earnings Growth

| About: Vicor Corporation (VICR)

Summary

Vicor's share price is at a 16-year high.

Last week, shares broke out on volume.

The company is forecasting dramatic growth in the data center market.

Vicor's proprietary Power On Package is a game-changing new product that will help the company dominate the power conversion market for high-performance computers.

Vicor Corp. (NASDAQ:VICR) just hit a new 16-year high on above-average volume. I believe this price movement is from the anticipated strong revenue and earnings growth as a result of the company's new products powering servers in large data centers.

Vicor has diversified away from serving a niche mass customization market to serving very large and high-volume customers like Google (GOOG, GOOGL) and IBM Corp. (NYSE:IBM).

The company has been supplying Alphabet 48V DC/DC converters for its servers for over 5 years now. Alphabet, along with Facebook (NASDAQ:FB), introduced a 48V rack design to the Open Compute Project, or OCP, early last year. With the OCP announcement, visibility for the Vicor 48V solution increased significantly. In my previous Seeking Alpha article titled "Vicor Has 48 Volt Solutions To Electrify Your Portfolio," I wrote about how the company would benefit from the 48V trend.

Now, Vicor has a new product that it calls Power on Package, or POP. POP is a proprietary Vicor product that puts the DC converter inside the Processor, GPU or ASIC’s package (from now on I will just refer to processor, but it applies to all three). POP is the latest enhancement to the Vicor 48V Factorized power architecture. This new product is a game changer in the power conversion industry, and it will drive revenue and profit growth for the company for years to come.

Here is a link to the Vicor application note that describes the POP.

POP works with a 48V architecture

Vicor's POP advances its 48V solutions and is compatible with the OCP rack design. The POP is ideally suited for large data center and supercomputer customers.

It reduces power loss

The POP can reduce the power loss by over 10%, as described in the above mentioned link. By reducing the resistance losses in the last inch, a processor can save from 25 W to 56 W! The savings can be huge when you consider supercomputers with tens of thousands of processors or a massive data center. The power savings alone is a significant reason why customers chose the Vicor solution.

POP is an enabling technology that can increase the performance of CPUs, ASICs and/or GPUs

The POP will free up pins on the Processor package. Some of the functions of pins are that they are used to input power, and to input and output data. This is important because in high-performance computing applications, the processor needs to be constantly inputting and outputting data to either memory or other processors. With more pins, more data can be transferred, and therefore, a computer using this technology can be faster.

A simple analogy is a warehouse that operates 24/7 bringing in and sending out merchandise. Let’s say that you have two identical warehouses with 10 doors. One has 6 doors for bringing in and sending out goods and four doors for bringing in electricity. The other warehouse has 9 doors for bringing in and sending out goods and one door for bringing in electricity. Which warehouse will have the most goods transferred? With the POP, the processor will be able to transfer more data, and therefore, will have higher performance.

With the converter inside the package, space is freed up around the processor. This allows memory and or other processors/co-processors to be placed closer to the processor. This closer placement allows for faster interconnect speeds between the processors and or memory devices. To use our warehouse analogy, if we are constantly delivering goods to a customer who lives 1 mile away verses a customer who lives 10 miles away, and assuming the drivers are driving at the same speed, which warehouse will deliver more goods? Obviously, the answer is the warehouse with the closer customer.

A picture says a thousand words. Take a look at a picture of the Nvidia (NASDAQ:NVDA) GPU here. You can see the sixteen converters, 8 on each side of the board. Now imagine this board with those 16 converters gone and with only one or two tiny converters that are inside the Nvidia package. Imagine the pins that are freed up to input and output data. Imagine the cost difference between a tiny converter housed inside the package versus the 16 converters in this picture. Imagine the cumulative power savings of tens of thousands of processors.

Vicor will gain considerable market share as customers learn that the company's POPs enable higher-performance computers and saves electricity costs.

POP is shipping today

In the last conference call, Patrizio Vinciarelli, Vicor's CEO, mentioned that the company had shipped approximately 40,000 POP converters and was scheduled to ship 160,000 more. The revenue from the POP is all incremental. We should see a nice pop (pun intended) from the POP this quarter.

Vicor has stated that it is working with at least two other companies with this technology.

As POP becomes more widely accepted, other high-performance computer manufacturers will be forced to use the Vicor converters in order to stay competitive.

It is cost-effective

A large data center customer will save considerable money over the life of their servers because of the electricity they will save by using the Vicor POP.

Vicor's CEO has stated that the price of the POP is very competitive. He elaborated that the cost to build the POP is low, but the company's plan is to pass the cost savings on to its customers in order to drive volume.

Vicor has a history of having very high-performance parts, but not necessarily at a price that was suited for very large volume customers. Over the past several years, the company has driven the cost out of its products, as I explained in this article. This POP is a continuation of this drive to lower costs and increase performance and is instrumental in its growth strategy.

POP Summary

POP is a game changer, and it is truly enabling technology. The incremental revenue from the POP and its other new products will propel Vicor's revenue and earnings higher for the foreseeable future.

Vicor and the IBM Power9

Vicor has design wins (not necessarily POP) with the IBM Power 9 processor, and the associated memory rails.

Google and Rackspace (NYSE:RAX) co-developed a 48V open server architecture based on new IBM Power9 Architecture.

WyWinn, a major provider of servers to data centers, has published a paper describing the benefits of a 48V server using the Vicor solution for servers in the OCP and for the IBM Power 9 servers.

The IBM Power 9 is expected to ship next quarter, and Vicor will see a significant bump in its revenue, as it supplies power converters for the IBM processor in large data center applications.

Picture of an OCP Power 9 server with Vicor Converters This is a picture of an OCP server board that I took at the Vicor Annual meeting. Please note that the gold CHIP's are the Vicor converters. The three in parallel are powering the IBM power 9 processor. The others are powering the memory rails. In the upper half of the picture you will notice a chip missing. This was an engineering sample board and the converter was simply missing. Notice the contrast of the three converters powering the processor vs. the 16 in the picture of the Nvidia GPU that I had supplied a link for above.

Automotive

More and more electronics are being used in automobiles. Tesla (NASDAQ:TSLA) has started including Nvidia GPUs in every car. All of these electronic devices need to have power converters, and Vicor has solutions that are 1/5th the size and weight of a conventional converter. Here is an article that describes how important size and weight are to an electric vehicle.

The automotive industry is starting to switch to 48V, and Vicor has a very compelling product for that market. Here is a link to the company's small and lightweight solutions for the automotive sector.

Design Wins

Vicor's CEO has stated that the company has at least 3 design wins with GPU vendors. It has multiple design wins with data center customers for powering the Intel (NASDAQ:INTC) Skylake processor. As mentioned above, it has design wins with the IBM Power 9. The company also has several Supercomputer design wins.

Some of these design wins have gone into production, but others are just starting to ramp or will be ramping in 2018. Its revenue is expected to spike as the result of the anticipated ramps.

Vicor's Business Indicators

Vicor is looking for 1st, 2nd and 3rd shift workers. The company needs the additional workers to meet the increase in demand for its products.

Reader "Waveform" has posted in the comments section of my previous Seeking Alpha articles about the APLI for several years. He actually drives by the factory on the weekends, usually on Sundays, and estimates how many cars are in the parking lot. Last Sunday, he counted approximately 50 cars. This is a good number, and it means people are working in the plant on Sundays. In previous years, there were no cars in the lot on Sundays.

In the last conference call, the CEO mentioned that the third shift was used to solve some inefficiencies the company had in the manufacturing of the POP. He elaborated to say that those inefficiencies were now solved. With the inefficiencies corrected, I believe the weekend workers are there for either increased production or setting up lines for new customers. Either way, it is a win for shareholders.

Risks

Vicor has had several false starts over the past couple of years. Just last quarter, low availability of DDR memory affected customers. The ODMs could not get enough memory to build their servers, and as a result, they did not need as many power converters as Vicor had previously anticipated.

The share price has run considerably over the past two years.

Vicor only has one location for its factory, and there are no second sources for its products. Some customers would prefer a second source. In its last conference call, the company talked about building another factory in order to meet the anticipated demand for its new products.

The whole 48V trend is new, and the majority of servers are still 12V. At this time, many server customers are not willing to shift to 48V.

Putting a converter inside a customer's package is a very sensitive issue. Customers demand a very "quiet" converter. They do not want any electromagnetic interference with their processors. Because of the proprietary nature of the technology with no second source, the business and technical relationship with Vicor must be very intimate. The customer must have complete confidence in the company's ability in order to place the converter into their package.

While there is no known competition for the POP (if someone else thinks there is competition, I would love to hear your thoughts), there is some for 48V to POL solutions. Here's a link to an article rating the competitors.

There is no Wall Street coverage on Vicor, and the share price is very volatile. This could also be a positive, because the company is a hidden gem.

Summary

As we are approaching the end of the quarter, Vicor share price is at a 52-week high. The company has 39,000,000 shares outstanding. The CEO owns over half of the shares. This is a very illiquid stock with very low trading volume. Good revenue and earnings will propel the stock price higher.

With multiple design wins in multiple industries coming to production, I expect the company to post increased revenue and earnings for the foreseeable future. I have a strong buy call on Vicor.

These are my thoughts, so please do your own due diligence.

Disclosure: I am/we are long VICR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Vicor is my largest holding. Please do your own due diligence. The article reflects my beliefs and you should consult a financial advisor before investing.

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