Vicor Corporation Aktie

Good day, and thank you for standing by. Welcome to the Vicor First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good morning, and welcome to Vicor Corporation's Earnings Call for the First Quarter ended March 31, 2026. I'm Jim Schmidt, Chief Financial Officer. And I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing.

Earlier this morning, we issued a press release summarizing our financial results for the 3 months ended March 31, 2026. 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 the 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 2025 Form 10-K, which we filed with the SEC on March 2, 2026. 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, Tuesday, April 21, 2026. 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 webcast replay of today's call will be available shortly on the Investor Relations page of our website.

I'll now turn to a review of Q1 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 changes for P&L and balance sheet items, and refer you to our press release or our upcoming Form 10-Q for additional information.

As stated in today's press release, Vicor recorded product and royalty revenue for the first quarter of $113 million, up 5.3% sequentially from the fourth quarter of 2025 total of $107.3 million and up 20.2% from the first quarter of 2025 total of $94 million. Advanced Products revenue increased 3.7% sequentially to $64.9 million and Brick Products revenue increased 7.7% sequentially to $48 million. Shipments to stocking distributors had increased 0.5% sequentially and increased 63.6% year-over-year.

Exports for the first quarter decreased sequentially as a percentage of total revenue to approximately 48.9% from the prior quarter's 49.3%. For Q1, Advanced Products share of total revenue decreased to 57.5%, compared to 58.4% for the fourth quarter of 2025 with Brick Products share correspondingly increasing to 42.5% of total revenue.

Turning to Q1 gross margin. We recorded a consolidated gross profit margin of 55.2%, a 20 basis point decrease from the prior quarter. Q1 gross margin increased 800 basis points from the same quarter last year.

I'll now turn to Q1 operating expenses. Total operating expense increased 4% sequentially from the fourth quarter of 2025 to $45.5 million. This increase included higher legal expenses related to enforcement of our IP. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A and R&D was [indiscernible] and [ $1,057 billion ], respectively, totaling approximately $3.9 million.

Turning to income taxes. We recorded a tax benefit for Q1 of approximately $0.3 million, representing an effective tax rate for the quarter of minus 1.3%. The company's tax provision and effective tax rate for the quarter ended March 31, 2026, was positively impacted by stock options exercised in the quarter. Net income for Q1 totaled $20.7 million. GAAP diluted income per share was $0.44 based on a fully diluted share count of 47,254,000 shares.

Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $404.2 million in Q1, an increase of $1.4 million sequentially. Accounts receivable net of reserves totaled $67.4 million at quarter end, with DSOs for trade receivables at 42 days. Inventories net of reserves increased 3.8% sequentially to $94.8 million. Annualized inventory turns were [ $2.1 million ]. Cash flow used for operating activities totaled $3.9 million for the quarter, which was net of a litigation settlement payment of $28.6 million.

Capital expenditures for Q1 totaled $12.4 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $10.7 million and with approximately $33.9 million remaining to be spent.

I'll now address bookings and backlog. Q1 book-to-bill came in above 2 and 1-year backlog increased 70% from the prior quarter, closing of $300.6 million.

2026 is a year of great opportunity for Vicor. We expect Q2 revenues of nearly $126 million, and 2026 revenues of nearly $570 million. This guidance is based on conservative assumptions about our licensing practice, specifically that we will not enter into new licensing agreements until our second ITC case gets to its final determination in 2027. Additional exclusion orders further restricting importation of infringing computing systems will provide motivation to close new licensing deals on the right terms. Along with revenue growth in 2026, we expect margin expansion. Phil?

Thank you, Jim. With the book-to-bill above 2, Q1 bookings were strong across our high-performance computing, industrial and aerospace and defense markets. They remain strong in the second quarter, and I'll discuss each of them in turn. Our lead computing customer is continuing a steep production ramp of its wafer scale engine with best-in-class AI inference performance. Wafer scale engines and future embedded multi-die and [indiscernible] packages for AI chiplet solutions are uniquely enabled by vertical power delivery.

Further advances in AI performance are about to be enabled by Vicor's second-generation VPD solution with 3 amps per square millimeter current density on a current multiplication factor of up to 40 in 1.5 millimeter thin package. Through my Q4 comments, engagement with other HPC customers for second-generation VPD solutions, we'll follow the generational transition by our lead customer.

With capacity in our first chip fab year marked for existing strategic customers, we will continue to be selective as we add additional customers. On the VPD front, competition is handicapped by a multiplicity of issues, including inadequate current density and stacked packages that are not mechanically and thermally adept. That's because competition copied a first-generation VPD solution whose pioneering aspects are still immature and at risk of continuity of supply challenges caused by patent infringement. Our broad industrial market, which is supported by our global distribution partners had a strong first quarter, and our top 100 industrial OEMs in the automated test and semiconductor manufacturing equipment markets continue to benefit from the AI data center build-out with strong order placement.

We are also winning next-generation platforms with earlier generation and new factorized power system solutions. Our current multipliers supplying high power to ASIC and memory test heads and pin Electronics remain unchallenged in terms of current density, low noise and thin packages.

Geopolitical developments have been a key driver of our aerospace and defense business in recent quarters. Increases in spending as a percentage of GDP and replenishment of defensive and offensive systems supports the growth of this market. Our objectives, goals and strategies for 2026 remain unchanged with a focus on a portfolio of 100 customers globally across 4 market segments. Future growth opportunities will require capacity expansion, including a second fab. Our combinatorial strategy of being the power system technology innovator and an IP licensing company is delivering results. With that, we'll take your questions.

[Operator Instructions] Our first question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the nice results and outlook. I guess I wanted to start with just the assumptions you're making around 2026 for the IP licensing business, looks like royalty revenue and Q1 was about $15 million or about $60 million annualized. I know you're not assuming any additional or new licenses signed. But where do you see royalty or licensing revenue this year as part of that [indiscernible] guidance?

The [ 570 ] guidance includes royalties, which would increase somewhat based on existing licensing agreement. But in terms of providing, in fact, safe guidance, we thought it would be best to sell aside any opportunity with respect to, if you will, early deals relating to current actions. So our working assumption for guidance purposes is that we're not going to have any until we get to further domination our second case next year, but it could be that we do get some ahead of that time frame.

Understood. And then Patrizio last quarter, you seem pretty confident that the utilization in handover would approach 80% by the end of '26 or early 2027, looks like you're on a strong product ramp. But are you still sort of comfortable or still expecting utilization to sort of achieve those levels that you discussed last quarter?

Yes. In absolute terms with respect to product revenues, what has transpired since we last spoke on this topic is that we actually have a significant level of elasticity with respect to expansion in capacity within the [indiscernible] facility that's giving us a little bit more flexibility with respect to the timing and choice of the location for the second fab. So to get a little bit more specific, we've seen an opportunity for revenue significant expansion in capacity. It could be as much as 50% above what had been planned to be supported in terms of annual revenues out of the first seat facility. So that gives us cushion with respect to timing, which we are fully to good use in terms of the choice of location.

And to give you a little bit more [indiscernible] with respect to that, we've also come out to focusing on existing buildings as opposed to a piece of land because of the fact that with an existing building, we can execute much more rapidly in terms of capacity expansion and part of this strategy with respect to getting more out of the [indiscernible] facility is to selectively source outside of the facility, some of the process steps that can be more easily relocate it. So that should give you the picture with respect to both the capacity utilization and the plans with respect to the [indiscernible] expansion.

Sorry, Patrizio, just a quick clarification. Did you say that in the first Andover facility, you would be outsourcing some manufacturing steps either to third parties? Or would that be to the second chip fab?

It would be to an interim location for the second chip fab, but this will still be told within Vicor control. But there are process steps that can be easily located in a nearby building. And that's part of the plan to extend capacity the LFL seat facility.

Our next question comes from the line of Justin Clare with ROTH Capital Partners.

I think first off, you mentioned engagement with additional VPD customers, I think, had followed the generational transition for the lead customer from Gen 4 to Gen 5. I was wondering if you could just provide an update on the anticipated timing of that transition. I think you had previously been looking for the second half of 2026. And then so just trying to get a sense for when the potential orders with additional customers could be and what the revenue timing might be?

Yes. So the generational transition we're referring to, it will be enabled in the second half of this year. And we expect ramp to begin before the end of this year with respect to that next-generation capability with the lead customer, and we will follow that with additional customers for second-gen VPD solution. As Phil pointed out earlier, we are planning for the incremental capacity that we're going to have available to support opportunities that are, as in the case of our lead customer, long-term strategic to Vicor.

And [indiscernible], in spite of capacity expansions, we expect to remain capacity constrained for a substantial time frame. And that leads us to want to pick the right companies applications where, as in the case of the lead customer, we can make a very substantial difference with respect to levels of performance and opportunity to win substantial market share.

Got it. Okay. And then just on the backlog in Q1, backlog increased significantly here to just over $300 million. Wondering if you could speak to how quickly you anticipate turning that over? And then assuming you get to, well, and then, I guess, just as the business continues to scale, how do we think about the lead times and the conversion of that backlog? And then maybe how much backlog do you think may be necessary in order to support the $800 million run rate that you have previously talked about?

Well, so starting with Q2, the bookings are just as strong as they were in Q1. So we expect to once again in Q2, we have a very strong book-to-bill. So the backlog is going to keep building up as we step up the revenue levels and capacity utilization as the year progresses.

No, I think the question was the existing backlog. I mean that rolls pretty much over the next 12 months. That's how we recognize it, so yes.

Got it. Got it.

And Justin, and any backlog we quote -- the bookings we quote, it's always a 12-month window, just so.

Got it. Okay. And then maybe just one more on the capacity. So you've -- you're talking about expanding capacity at Fab 1. How much capacity do you anticipate adding what level of revenue do you think could be supported by the first fab. And then I think you had talked about this a little bit in terms of the potential size of Fab 2, but I'm not sure I caught it. So maybe just what revenue level could be supported by the second fab?

So you might recall in the past, we had earmarked capacity out of Fab 1 at roughly $1 billion per year run rate. We see a way to get that to at least $1.5 billion at this point. And that's coming out of a combination of initiatives we've identified with certain process steps that have been historically capacity limiting overall opportunities to get to a shorter cycle time and increase capacity with those steps. So that's a key element of this capacity expansion plan.

To complement that, as I mentioned earlier, we see opportunities with process steps that are not as critical and which can be easily redeployed an opportunity to redeploy them in existing neighboring facility against a stepping stone to the second fab, which has got a longer lead time in terms of what it takes to bring it to fruition. So we believe this approach gives us a lot more flexibility. It will improve our opportunity for significant margin expansion because we will not be incurring for a certain level of capacity as much in terms of additional equipment and depreciation.

And overall, it is a plan that meets the combinational objectives that we sell ourselves and the need to support a variety of market opportunities, not just in the compute space, but in the other markets, where we're seeing considerable spend.

Our next question comes from the line of Jon Tanwanteng with CJS Securities.

Congrats on the next quarter and the strong orders and outlook. My first question is, Patrizio you mentioned you expect to be capacity constrained before you expect -- expect the new fabs to come up. And I don't know if the expansions will occur before that as well. But what does that mean for your customers and their sourcing strategies? Do they need to turn to your competitors? Or do you have some kind of licensing strategy that you may employ or have in mind to help them avoid that constraint? Just help me understand what the timing is around their growth trajectory is and what you expect your capacity to be underlying that?

So first of all, we purchased a second [indiscernible] interconnect line that's going to be installed in the Q3, Q4 time frame. So that is of itself is an element of the capacity expansion plan. Second, as I mentioned earlier, with the issue of the 3D interconnect line, we have identified ways to reduce cycle time and increase capacity universe proportion. Beyond that, we have expansion plans outside of the [ federal seed ] facility. And we are engaged in discussions that could lead to an open source for our second-gen VPD technology, which we believe is going to be in great demand for a variety of reasons in years to come [indiscernible].

It is the only way we know how to address the current demands of processors with all of the right attributes. The way it is done with competitive alternatives to some degree, build upon what we call first-generation VPD technology is, as suggested in the earlier remarks, challenged in a number of respects because of the inadequate current dense. So it's fundamentally a dominant fact. In other current density forces stacking of the elements of the solution, the stacking as mechanical complexity and terminal challenges because the heat gets trapped within the stack is fundamentally enough keeping up with escalating current density needs in future generation of processes.

So even though we have ambitious capacity expansion plans, we see an [indiscernible] playing a key role in years to come in terms of achieving greater overall penetration and win-win opportunities in the marketplace.

Got it. Could you also talk about the upcoming 800-volt data center architecture and the potential for a transition to like a 6-volt intermediate bus and where your 48- to 12-volt systems sit within that? Do you expect maybe the NBM market to continue to grow as those architectures take share? Or is there a transitory period where maybe that falls off and maybe transition to your VPD technology and licensing royalties on that side?

So we believe the initiative to go directly from 800-volt to 6-volt is, frankly, ill-conceived. It's internally inconsistent. And it's relatively easy to understand why. The logic of bussing power, the 800-volt is predicated on that power distribution being a higher voltage, more efficient. And there is an opportunity to improve efficiency by a few percentage points through the use of 800-volt pass. But inheriting that it is the opposite effect on the other end of that proposed bus conversion that because going all the way down to 6-volt, as you can imagine, relative to 48-volt, the ratio being essentially 8:1. You have to square that. So the quarter of 8 is 64x.

So the position of changing power distribution next the part of low down to 6 volts is fundamentally challenged by the exciefficiency of distributing any amount of significant power at 6 volts. You can only go short distances and retain some level of efficiency, but to some extent, that's incompatible [indiscernible] not being safe, right, because it can give rise to hazards. So there's a lot of challenges with the low concept. And fundamentally, it is a change in direction, away from where the fab should be, which is at the point of load with respect to vertical power delivery, that's where the core challenge technically the size and going off and trying to figure out how to save a few points out of 800-volt distribution, particularly when you combine that with a step all the way down to 6 volts is, in my opinion, a better idea. But the time will tell.

And by the way, Vicor has provided the technology other than the volt, we did a lot of pioneering developments with respect to bus conversion from 800-volt. And should that be successful to any degree that there's going to be issues with respect to IP there, too. But in terms of your question as to what we expect to happen with that. We expect it to move forward. But we think it's a diversion from the real challenge, which is at the point of load, any particular other points to load with respect to vertical power delivery.

Our next question comes from the line of John Dillon with D&B Capital.

First of all, congratulations, especially on the bookings looks really good. I just wanted to go back to capacity for a minute. I want to make sure my numbers are right. If I heard correctly, you've got about $1 billion in capacity in your current fab. You can add another $0.5 billion. But on top of that, you have bricks. And I would guess your bricks would be at least $250 million. So am I right in assuming that your capacity with this expansion in the current area is about $1.75 billion?

No. So the bricks are part of it. I don't think they're quite at a level of $250 million. And as we've been saying for quite some time, before too long, they are practically irrelevant. We shouldn't be thinking about bricks. And in effect, part of our strategy with respect to the expansion of capacity, the [indiscernible] is to minimize the footprint, taken up by legacy products that don't have the growth opportunity of advanced products, in particular, second-gen VPD.

So the number I quoted earlier as a step-up in our capacity plan for [indiscernible] from $1 billion to $1.5 billion, that's an inclusive number. Now that inclusive number could potentially go further up, but it wouldn't be because of the big contribution. It would be because of more opportunity for special capacity of advanced products.

Got it. So you see you could get above $1.5 billion [indiscernible]?

Yes, we feel comfortable with a $1.5 billion target at this point in time. And again, the same process that has led us to identify opportunities to set capacity up measured in revenues per year from $1 billion to $1.5 billion, may have yet some further opportunity. Again, the logic behind it is to give ourselves more runway with respect to the next set of steps, which include a variety of strategic choices ranging from the second fab to [indiscernible].

Excellent. And with this expansion capacity, will you be able to satisfy the OEM and the hyperscaler customers you talked about in Q3 that came to you back in Q3 conference call, you mentioned those 2. And I'm wondering if this expansion capacity will be able to satisfy them?

Yes.

[Operator Instructions] Our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group LLC.

I guess my first is a simple one here. The backlog has risen very nice, I think, 70% sequentially. If you could characterize the sources of that increase here, whether it's from the lead VPD customer or anyone else in the kind of the high-performance computing space and in all other markets, you could characterize between those 3, that would be helpful?

Richard, it's Phil. So in high-performance compute, yes, it was the lead customer and the hyperscaler customers that we have. But we also saw some really good lift in industrial and the defense aerospace markets, as I commented. It was really strength across the board in our broad markets as well as in high-performance compute with a few lead customers.

Okay. Great. My follow-on question is, and apologies if I missed something, I had a couple of interruptions here. But wondering if you could discuss the engagement or even design win status with follow-on VPD customers here. It sounds like, if I heard correctly, you're talking about strategic reservations on either capacity in the first fab or the proposed second one here, I wondered if you can discuss the dynamics around those follow-on customers?

So I suggested earlier, Richard, we're very much focused on competing readiness with respect to starting generational change with a lead customer. And with some other opportunities relating to that. I guess a way to think about this is that in spite of the capacity expansion that we are pursuing, we see ourselves being essentially sold out in terms of capacity for the foreseeable future. And that gives us the opportunity to be very selective with respect to new engagements in terms of their strategic significance and alignment of interest for the medium to long term.

So in a way -- in a way analogous to the comments I made earlier regarding expansion of capacity coming out of [indiscernible], first of all, giving us more time and opportunity with respect to parallel initiatives, on the front end of the business, just like the back end of the business, the fact that we're going to be enjoying some bookings and a strong backlog, and we have near-term capacity nearly sold out, gives us an opportunity to align ourselves with the right applications and the right customers going forward. So we don't have to feel a sense of urgency because of where we stand in terms of the demand side.

Our next question is a follow-up from Quinn Bolton with Needham & Company.

Patrizio, just a quick clarification on the capacity expansion in Andover. When would you expect to reach that $1.5 billion of capacity. Is that end of '26? Is it going to take into sometime in 2027? And then I've got a follow-up.

Well, so I don't think we want to be that specific at this point in time. As I'm sure you noted, because of change in circumstances, we achieved the necessary comfort level to provide guidance for revenues for this year. But as we get past that, there are still so many different scenarios that it would be unwise to become very specific beyond saying that we have [indiscernible] to step up the capacity further. And we believe that there is the market demand to use that expanded capacity as we get into '27 and beyond.

Got it. Okay. That's understandable. And then I just wanted to come back, I think Phil, it was Phil that mentioned on the second-gen VPD, your solutions are 1.5 millimeters high. I just wanted to clarify that. And if that's the case, I guess, at the recent APAC conference, there are a ton of presentations on vertical power with folks like NVIDIA and Google asking suppliers to hit 3 millimeters or below it. It sounds like you may be well below that threshold already. And so just wondering if you can talk about the interest you're seeing on the VPD products because it does sound like you may have a major advantage in package height versus the competition?

We do. And actually, it is even bigger than you might think for reasons I'm going to explain in a moment. It's not just that our solution is 1.5 millimeters thin. But as Phil pointed out in his prepared remarks, is that combined with the fact that our solution provides 40x current multiplication. And it does all that with 3 amps per square millimeter current density. You need to really in order to assess the figure of merit of a technology, you need to look at these 3 elements in combination. You can't just look at one.

As an example, so-called integrated voltage IVRs. They can be even thinner than [indiscernible], but they don't provide any meaningful current multiplication. The only step up the current by 2x, which is practically speaking, useless in terms of efficient power delivery to the point of low because in order to deliver, let's say, 0.6, 0.7 volt, 2000 app, they would require a 1,000-app feet, which is obviously extremely programmatic. So it's not just thickness. It's thinness combined with current density and most importantly, current multiplication because in order to have a VPD solution that is capable of supporting wafer scale or other kinds of advanced compute capabilities, you really need the combination of all these elements, not just one of them.

Our next follow-up comes from the line of Jon Tanwanteng with CJS Securities.

Jim, can you touch on the taxes in the quarter? What went into that tax rate? And then what rate can we expect going forward? And then I have a follow-up after that.

Yes. So when we closed fourth quarter, we reversed a significant portion of the valuation allowance and our expectation was more or less that we would be in the range of 20%-ish percent of -- in terms of an effective tax rate. What happened, Jon, in Q1 is that there was a substantial pent-up demand in terms of stock options that get exercised that nice spread between strike and exercise price, and that's a tax benefit for us. So that's a onetime discrete item that doesn't get baked into the effective tax rate. And our feeling is that going forward, there'll still be that effect, which is a positive effect for us, but planning can be more in the line with a 20% kind of a rate.

Perfect. And then Patrizio, could you talk a little bit more or maybe Phil think about the demand from the defense and semi test businesses, what percentage of revenue are they, #1? And number two, just with regards to the defense piece specifically, are you able to meet the critical defense needs that the U.S. has with the upcoming capacity constraints that you're modeling?

Yes. I'm sorry, some of your words [indiscernible]. Can you repeat the first question?

Yes. First, the percentage of semi test and defense in the revenue today? And second, can you meet defense demand as it grows given that it's critical given the capacity constraints that you're modeling going forward?

Yes. So Jon, it's Phil. We don't break those things out. But the answer to the question is we can meet the needs of the defense market with the capacity that we have.

Our next follow-up comes from the line of John Dillon with D&B Capital.

I was just wondering, does Vicor have any vertical power licensing agreements that will generate revenue this year?

So there may be opportunity of alternate sourcing of the second-gen VPD technology. But this is not something that we're prepared to talk about today.

Okay. And Phil, on the bookings, can we assume a bookings run rate of what we saw today for the rest of the year?

So John, I think the bookings are going to be above -- well above 1, like Patrizio talked about, but [indiscernible]. So I don't want to be pegged to particular ratio, but they are very strong going into Q2, and we'll say well above 1.

Our next question comes from the line of Don McKenna with D.B. McKenna & Company, Inc.

Yes, Phil, could you PAUSE give us an idea of what percentage of the backlog is attributable to your lead customer?

Again, we don't break that out. They're an important lead customer for us, but they're not the only major one. We've got a hyperscaler and big customers across industrial and defense and aerospace that are ramping as well as just the broad market. So it's just general strength right now that's really good that we're benefiting from.

[Operator Instructions] Our next question comes from the line of Neil Gore, shareholder.

In the past, you said you expect that royalty income could grow to as much as 50% of product revenue. Do you still have that expectation?

The expectation of the licensing as a percentage of product revenues, we've talked as much as 50%. The question was, can we -- do we still hold to that?

Yes, we feel very good about a licensing practice. We are investing heavily in it. It will be investing in it at an escalating rate because we see that business as being both a high-growth business in terms of its top line and needs to say, is nearly 100% margin in terms of profitability. We anticipate as discussed in prior meetings that there would be a time in the Northeast future when OEMs and hyperscalers will be Vicor licensees with only perhaps rare exceptions. We see that dynamic progressing. And and we think we're pretty close to a crossing of the [indiscernible] with respect to the industry wanting to be protected in terms of a license enabling power system technology from Vicor.

Do you expect that some of the other lawsuits that you have had to violating your patents, has anyone approached you to settle after the big settlements you received earlier last year?

So we carried the first ITC case to a successful conclusion. And to be clear, that conclusion doesn't mean that the recent ongoing opportunity relating to the first ITC case. In fact, there is an action pending at customs as we speak, relating to that first exclusion order. While we're working with the case we brought earlier this year, for which the ITC once again chose to issue an investigation to get that to [indiscernible], which should result in a second exclusion order. And this may not be the end of the road. I mean, in Italy, we are saying that there is no 2 without 3. So there's been 2 thus far. Don't be surprised if you see a third one.

And -- and so this is again part of a very comprehensive campaign. Vicor has been the pioneer in the power system industry, always very much in the forefront of very high-power density and performance for nearly 40 years. As a longstanding pioneer in the industry, we have -- we got into places well ahead of any competitor and scouting this new landscape with respect to power distribution architecture, power conversion engines, control system, advanced -- conversion components. We have consistently pursued an extensive protection through many patents. And low and behold the industry given demands in AI and with respect to other electronic systems now is very much in need of those kinds of technologies that Vicor pioneer.

So licensing is going to be an expanding portion of our business, a very significant one in some right beyond our module maker through, again, unique fabs revenue capability.

Okay. And next question, are there any expenses affiliated with licensing revenue? Is it part of your SG&A perhaps?

Any expenses associated with licensing revenue? Of course, the lease.

Yes. So we have partnered with law firms that have the share of the interest in the outcome, subject to caps and so on and so forth. So as we regard the licensing income, we record an operating expense for the share of the proceeds from the litigation [indiscernible] to the licensing deal owed to our partners.

Our next question is the follow-up from Justin Clare with ROTH Capital Partners.

So just wanted to hear, so we did see a large transaction announcement between Open AI and a wafer scale supplier last week. And just wondering against that backdrop, can you share how your visibility into demand has evolved over the last quarter? And then maybe if you could comment on the size of the opportunity you're seeing with your lead customer for vertical power and how that compares to the visibility you had last quarter?

Well, I think we felt very strongly about our lead customer technology and their market opportunity. And frankly, for a number of years, I was confronted with the degree of skeptics by investment bankers and the like [indiscernible] the same level of confidence Vicor had in our lead customer. And so that's been proven out to be the right expectation. We think they have a real technological advantage, at least for a certain class of AI applications, and that will translate into a share -- market share growth and we believe substantial success in years to come. And that's an opportunity for us just to say, as we have with the AI market in general.

Our next follow-up comes from the line of Richard Shannon with Craig-Hallum Capital Group.

Let me follow up kind of a multipart question around licensing. Maybe if you can update us on the number of licensees, you currently have generated revenues. And if there's multiple licenses [indiscernible] probably good understanding there. And then also wondering if you have any licenses that are expiring and need to be renewed like this calendar year. And then ultimately, you talked about the ability or the belief in growth in this business here. To what degree do we need to see growth in licensees versus number of licenses? Or can you grow at the rate that you're expecting without any growth in those numbers?

So I view our business model as being very resilient, very redundant because we have great opportunities as a module maker, and we have great opportunities as a license sale of enabling technology. And those 2 opportunities are very synergistic because in licensing deals, we provide incentives for OEMs, hyperscalers to be more than license fees to be customers of our modules in advanced technology, power system solutions. So we feel -- I feel, speaking for myself, very confident we're going to be very successful on each of those two fronts. And again, they reinforce each other in pretty much every where.

Richard, maybe I can -- also, if you don't mind, I'll add a little bit to that. So if you look at products that are getting launched later this year, maybe early next year, from different GPU companies or even hyperscalers. A lot of them are going lateral and vertical because they can't really solve the full vertical problem, the vertical challenge because of what Patrizio has talked about. Lack of current density, mechanical issues. And so you'll see a little bit of lateral with a bit of vertical. And that vertical, as we talked about, copies our first-generation VPD.

If you go to what [indiscernible] and the wafer scale companies do, you've got a challenge there of bandwidth, which they solve through their wafer scale engine. Everybody now is starting to look at the colos packaging, the packaging that Intel has brought to market with multi-die chiplet. The only way to power that stuff to solve the memory bandwidth problem is pure vertical power delivery. And that's where you need 1.5-millimeter high packaging, greater than 3 amps per millimeter squared current density and 40x the -- if you like, the capability of the power delivery to that network [indiscernible] multiplication where you -- at 6 volts, you've got 64x the power losses then at 48 volts. And at 2 volts, you've got 526x the power losses for an IVR system.

So you start to run into real fundamental issues here where the VPD technology, our second-generation VPD technology for these future technologies where we're going to focus on these strategic alignments where they really need the Vicor VPD, that's where we're headed.

Again, the competition tends to focus on one element, like current density, and they can make some headway with respect to that element. But [indiscernible], in the architecture, it is a conflict among key elements of the solution where, fundamentally, you got to take off one to make it little better for the other when the right solution, the [indiscernible] solution must involve all of these ingredients, high condensity, high current multiplication in a solution that is relatively thin. And by the way, we're not stopping at 1.5 millimeter, we're going thinner. So because as we get to Power-on-Package, it will need to be thinner and with our technology, we can go a lot thinner.

Our last question comes from the line of Don McKenna with D.B. McKenna & Company.

This is a simple one, guys. I haven't been able to attend the annual meeting for the last few years because of a conflict and timing. And I'm hoping that you don't schedule it for the 20th of June this year.

Well, the 20th of June is a Saturday. And so it's -- I'll let the [indiscernible], the proxy coming out soon. The annual meeting is Friday, June 19.

19. Okay.

This concludes the question-and-answer session. Thank you all for your participation on today's call. This does conclude the conference. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Vicor Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, and welcome to Vicor Corporation's Earnings Call for the Fourth Quarter and Year ended December 31, 2025. I'm Jim Schmidt, Chief Financial Officer. And I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; Phil Davies, Vice President, Global Sales and Marketing. After the market closed today, we issued a press release summarizing the 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 relating 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, 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 2024 Form 10-K, which we filed with the SEC on March 3, 2025. 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 19, 2026. 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 webcast replay of today's call 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 reported product revenue for the fourth quarter of $92.7 million, up 4.5% from the third quarter total of $88.7 million and up 15.3% from the fourth quarter 2024 total of $80.4 million. Royalty revenue for the fourth quarter totaled $14.5 million, a 33.1% decrease from $21.7 million in the third quarter and a 7.8% decrease from $15.8 million in the fourth quarter of 2024. The sequential decrease in royalty revenue was the result of a catch-up amount that was included in the Q3 results.

Product revenues for the year ended December 31, 2025, increased 12.1% to $350.3 million from $312.5 million for the prior year. Royalty revenue for the year ended December 31, 2025, totaled $57.4 million, a 23.2% increase from $46.6 million for the year ended December 31, 2024. Total product revenue and royalty revenue, including a $45 million patent litigation settlement received for the year ended December 31, 2025, increased 26.1% to $452.7 million from $359.1 million for the prior year. Advanced Product revenue, which includes royalty revenue, decreased 4.4% sequentially, which was the result of the catch-up amount of royalty revenue in Q3. Brick Products revenue declined 0.6% in the third quarter. Revenues for Advanced Products for the year ending 2025 increased 26% to $248.6 million from $197.3 million the year before. Revenues for both products for the year ending 2025 decreased 1.6% to $159.1 million, $161.7 million the year before. Shipments to stocking distributors decreased 11.1% sequentially, but increased 5.3% year-over-year. Exports for the fourth quarter increased sequentially as a percentage of total revenue to approximately 49.3% from the prior quarter of 42.8%. On a year-over-year basis, exports increased as a percentage of total revenue to approximately 50.8% from the prior year's 48.2%. Q4, Advanced Products share of total revenue, including royalty revenue, decreased to 58.4% compared to 59.4% for the third quarter, with product share correspondingly increasing to 48.6% of total revenue.

Turning to Q4 gross margin. We recorded a consolidated gross profit margin of 55.4%, approximately 2.1% less than the prior quarter as a result of the royalty catch-up in Q3. For the full year 2025, gross margin rose by 6.1% to 57.3% from 51.2% in the prior year. I'll now turn to Q4 operating expenses. Total operating expense increased 2.7% from the third quarter. For the full year 2022, total operating expense as a percent of revenue and patent litigation settlement decreased to 39.2% from 51.6% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods, SG&A and R&D was $1.08 million, $2.206 million and $1.153 million, respectively, totaling approximately $4.4 million.

For Q4, we recorded operating income of $15.7 million, representing an operating margin of 14.6%. For the full year 2025, operating income totaled $81.8 million or 18.1% of revenue in patent litigation settlement compared to operating loss of $1.3 million or minus 0.4% of revenue in the prior year. Turning to income taxes. We recorded a tax benefit in Q4 of approximately $27.3 million, representing an effective tax rate for the quarter of minus 142% as a result of the tax benefit due to the partial recognition of certain deferred tax assets in the period. The tax benefit for the full year 2025 was approximately $4 million, representing an effective tax rate for the year of minus 25.4%.

Net income for Q3 totaled $46.5 million GAAP diluted earnings per share was $1.01 based on a fully diluted share count of 46,297,000. For the full year 2025, net income increased to $118.6 million from $6.1 million in the prior year. In 2025, fully diluted earnings per share increased to $2.61 from $0.14 in the prior year. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $402.8 million in Q4. Accounts receivable net of reserves totaled $60.7 million at quarter end, with DSOs for trade receivables at 44 days. Inventories net of reserves increased 1% sequentially to $91.3 million. Annualized inventory turns were approximately flat sequentially at 1.96. Operating cash flow totaled approximately $15.7 million for the quarter. Capital expenditures for Q4 totaled $5.5 million. We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $7.8 million, with approximately $6.9 million remaining to be spent.

I'll now address bookings and backlog. Q4 book-to-bill improving sequentially, came in well above 1 and with 1-year backlog increasing 15.8% from the prior quarter, closing at $176.9 million. 2026 is a year of great opportunity for Vicor. We are working to deliver on the opportunities. However, given that we cannot predict with certainty the timing or amounts of outcomes relating to our licensing practice, we will not provide quarterly guidance. With that, Phil will provide an overview of recent market developments. And then Patrizio, Phil and I will take your questions. I ask that you limit yourself to one question and a related follow-up so that we can respond to as many as we can in the limited time. If you have more than one topic to address, please get back in the queue. Phil?

Thank you, Jim. At the beginning of 2025, we talked about the year ahead being one of challenges and opportunities. As we look back, 2025 met those expectations with improvements in product bookings and revenues in Q4 and our IP licensing practice becoming a major contributor to our top and bottom lines. As we exited 2025, book-to-bill ratio increased to over 1.2 in Q4 and has continued to increase in Q1. At the start of 2026, we can say that this will be a year of different challenges and greater opportunities. This should result in record bookings, revenues and profitability and significantly higher utilization of our first chip fab.

As Patrizio commented in today's press release, United States International Trade Commission has instituted a second investigation into illegal importation of power modules and computing systems, infringing Vicor's IP to nonisolated bus converters. By now, it should be clear that Vicor will methodically and relentlessly enforce its intellectual property to the many inventions it pioneered and that suppliers of infringing systems are putting themselves and their customers at risk, including unlicensed OEMs and hyperscalers. Following the example set by licensed OEMs and hyperscalers, companies with an ethical backbone should do the right thing, avoiding infringement by taking a license to secure their supply chain.

Our lead customer for VPD solutions is ramping a Gen 4 factorized power system before transitioning to a Gen 5-based solution with higher current density and performance. This transition is expected to start in the second half of this year, while production of the Gen 4 system will continue to ramp at a steep rate to the end of 2026. Engagement with other Gen 5 VPD customers will be selective as capacity in our existing first chip fab is getting earmarked for strategic customers and additional capacity from our second chip fab may not be available until 2028.

Our industrial and aerospace and defense business outlook for 2026 is strong, particularly in the automatic test equipment market, which is seeing substantial growth and projecting high growth to last for the next several years. Given our power density advantage, which is of paramount importance to our customers, I am confident that we can double the revenues in these markets over the next 4 to 6 years, respectively. As we approach high utilization of our first chip fab, we are beginning to engage customers in capacity reservation agreements to secure their supply needs. While in the planning stages of a second chip fab to expand the market opportunity, we are having discussions with candidates for an alternate source of high current density Gen 5 VPD solution. An alternate source will give licensed OEMs and hyperscalers broader access to best-in-class power system technology. In view of these developments, we remain confident in our business strategy of innovation, customer focus and market focus. With that, we'll now take your questions.

Our first question comes from the line of Quinn Bolton of Needham & Company.

Congratulations on 2025 and the record outlook for 2026. Patrizio or Phil, I wanted to start with your lead customer. It sounds like you're seeing a pretty strong ramp from that customer. And you mentioned that Andover is getting filled. Can you talk is Andover being filled largely from your lead customer? Or do you have other significant Gen 4, Gen 5 customers that are contributing to that growing utilization in the Andover facility?

It's a combination of demand, increasing demand on a number of fronts, not just hand computing where there is a multiplicity of factors at play with respect to increased demand on capacity, but also in test equipment, as Phil mentioned in his prepared remarks and some of the other end markets.

Got it. Okay. And then I guess maybe a follow-up on the IP licensing. In the press release, you talked about seeing record revenue from the IP licensing business this year. Just wanted to clarify, does that include or exclude the $45 million patent litigation settlement that was part of the 2025 revenue stream as we think about 2026?

We see our licensing business expanding. As Jim suggested earlier, the timing of elements contributing to the expansion is somewhat unpredictable. But as we look at the predicament that OEMs and hyperscalers face in terms of potential exclusion orders, we see a major opportunity for us to grow our licensing business considerably. As we have discussed in our last quarterly call, we see that business expanding greatly in the last couple of years. I think what has transpired since then suggests that those are conservative estimates.

And Quinn, just to clarify the number for you, the royalty revenue I quoted in my prepared remarks of $57.4 million in 2025 does not include patent litigation settlement. That's royalty revenue, it was up 43.2% from $46.6 million in 2020.

Got it. But just to clarify, Jim, when the comment in the press release about the business, the licensing business will expand, are you looking at the $57.4 million as the 2025 base? Or should we be thinking about that base being $102 million, which would include that $45 million patent settlement as part of the base?

So for one thing, there's going to be more patent settlements. And for another, the one patent settlement from last year in terms of the outlook for licensing business, it doesn't really make a substantial difference with respect to the upside with respect to this part of our business. We expect hundreds of millions of dollars worth of revenues from licensing and the $47 million event last year is in hindsight going to be in the bucket to be sure, but not all that significant.

Our next question comes from the line of John Tanwanteng of CJS Securities.

And also congratulations on a good year. I was wondering if you could give us a little bit more detail on the launch customer for VPT. You mentioned that they were going with the Gen 4 product. Could you talk about the decision that went into that and why they aren't starting with Gen 5 and kind of how that happened?

Well, so the Gen 4 system is mature. It's one that's got a track record of success that is expanding in terms of its opportunity in order to get to the next-generation system, mature design, a mature system. It's not just the power systems, the system as a whole needs to come to fruition. It isn't quite there yet. It will be there soon, and that will lead to the next set of opportunities. But to be clear, with our lead customer, we're seeing a significant share of our capacity being utilized as we get towards the end of this year on the earlier generation system. And the next-generation system will provide an additional layer of use of capacity as we get into next year.

Understood. And then when you start -- sorry, you're considering a new facility. I was just wondering if you're planning to build that yourself or are you still planning to work with partners to do that perhaps in a capital-light fashion. And just wondering what kind of capacity a new facility would have?

So we've made 2 offers on area where we could build a facility. The lead time associated with that though is 1.5 to 2 years when everything is done. We are also looking at existing buildings within 30-mile radius of and over to the North and the West. And we haven't decided yet which of these alternatives we're going to close on. But again, we've had 2 offers. No deal done yet, but I would expect that we're likely to do something on this soon.

And our next question comes from the line of Richard Shannon of Craig-Hallum Capital Group.

I'll also add my congratulations on a really good last year. My first question is on royalties and licensing here. As you mentioned, there are some questions here in the Q&A about growth in this business. I guess I wanted to triangulate it differently from how you've talked about in the past where you're hoping to get a roughly $300 million revenue stream. I know that's not entirely royalties, maybe some product in there, but talking about $300 million bogey between '24 and '26. And by my numbers, at least that would require a fair amount of growth, like doubling or so of your royalty revenues from '25 to '26. But you didn't talk about it that way this quarter. Can you maybe talk about it in those terms here? Is that a number that we should continue to expect better or worse? Just help us triangulate those things.

Yes. So we have 2 major licensees. We expect to have a lot more and future contribution from those 2 should become quite a bit larger. So I think in one way of looking at it, in high-end computing AI, systems require from the power system perspective, our IP. And to the extent that in order to be able to deploy those systems, a license will become necessary. that defines the opportunity. As you can see, the opportunity far exceeds what we've harnessed thus far. There's a lot more to be captured in years to come. So the $300 million number, which to your point involves contributions from royalties and business, licensees is not a long-term goal. It is a relatively near-term goal, not for this year, to be clear, but as we have said last year in a couple of years' time frame, but we can see going beyond that.

My follow-on question is on second-gen VPD engagements. You already talked about your lead customer today and in past quarters. But last quarter, you also mentioned engagements that didn't seem to be early stage ones with a hyperscaler and an OEM. And I didn't hear any comments in the prepared remarks, although I was a little bit late. So wondering if you can comment on the progress of those and the other ones you've added to the pipeline.

Yes. So Richard, this is Phil. So maybe I can get a little bit more granular on that. So the next step for us is over the next couple of weeks, we're bringing in our global FAE team that is dedicated to supporting customers in different locations where we have target hyperscalers and OEM chip companies located. So they will be going through, if you like, a boot camp on Gen 5 VPD using the demo boards and tools that central applications group here Andover have developed for the market. And so that's happening in the next couple of weeks. After we get that in place, as we talked about, we're going to be fairly selective in who we're going to be engaging with. It's very important we do that. And so that's the next step after that. So we FAEs are here in the next couple of weeks, and we're on the way.

Our next question comes from the line of Justin Clare of ROTH Capital Partners.

So first, I just wanted to follow up on the potential for capacity expansion here. So given the plan to add a second fab, I was just wondering if you -- how we should think about the ramp in utilization for your existing facility, how we think about that over the next couple of years and kind of what utilization threshold you anticipate reaching that is necessitating the additional fab here? And then just if you could talk about when do you anticipate kind of approaching that optimal utilization for the first fab?

So based on ramps with our customers in different markets with a strong contribution from high-end computing, we see the existing fab being well utilized within a year. And that's obviously prompting the initiative to secure additional capacity, both by bringing up a second fab and by having discussions with potential alternate sources that could provide customers with equivalent solutions using their own capabilities and our technology. In terms of the fabs, as I mentioned earlier, we've started exploring the opportunity of being about with a large piece of real estate, the flexibility to increment capacity in steps. As I remind you, this will be a campus that could support up to 0.5 million square feet of manufacturing space. Just to set things in perspective, the facility is around 300,000. So there would be substantially more in terms of the real estate available for capacity. But also given the learning that we've done, we think we can achieve more capacity per unit of area in our next facility. The thinking of late has evolved more towards potentially acquiring a building. And to be clear, there's been no decision one way or the other yet. It could go either way. But the benefit of doing it with an existing building is that the time to fruition would be year, 1.5 years shorter. So we might go that way. It would be on the same scale, though, in terms of the increment of capacity that we will bring about with the second.

Okay. Got it. That's helpful. And then just when you think through this, if you're reaching close to kind of optimal utilization within a year, I think historically, you've talked about your fab being able to support $1 billion in product revenue. So within a year, could you be close to that level where you're getting to a run rate of $1 billion in product revenue? And then just curious on the second fab, how much in CapEx spending you might anticipate in terms of what's required there?

Yes. So to be clear, fleet has a capacity, given the dollars per panel and the number of panels it can process of time to do slightly above $1 billion in revenues. But you wouldn't want to use 100% of the capacity because by definition, that will leave no room for error, right? So an 80% capacity utilization is the kind of number that you want to think of in terms of the test or fundamentally having achieved a very good capacity utilization. Now in terms of the next facility, whether it's by acquiring land, putting up a building and then equipping it with what is necessary in order to bring about that relative incremental capacity. This is in a proposition of the order of $250 million, $300 million, something that Vicor has to finance on its own given our cash position and our balance sheet.

And our next question comes from the line of John Dillon of DMB Capital.

Again, congratulations on a good year. Phil, I wanted to go back to the customers you talked about before in Q3 and Q4. I kind of got the impression that you had design wins and these customers couldn't find alternative ways to power their new AI processors. So I'm wondering, are those customers still working with you? Or they -- have they gone to other customers? Are you going to be able to meet their time schedule for their new products?

They have a need for a VPD solution in particular that has all of the right face. And the competitive landscape doesn't have that. And that's constrained the market opportunity for VPD to a very limited set of companies that have actually done it while incurring a great deal of pain because of the shortcomings of the power system. So what we bring about with our second-gen VPD and fifth generation modules is a solution that has much higher density and much higher greater level of manufacturing quality in terms of the assembly of the solution. doesn't require stack as generation VPD does. It's much easier to pool. It's more efficient. It has a number of benefits that manifest themselves in many ways. So as Phil suggested, we're going to be picking those customers that strategically want to be aligned with. We have a great deal of interest. As an example, we were out in the valley just a few weeks ago, in the morning with an automotive customer with a great deal of interest in our VPD capability. We haven't decided yet whether we engage in that particular case. We will be in a situation with our existing fab before we get another fab in place of deciding which applications make the most sense. And to say a lead customer is one that we prioritize. There's going to be more in that league in that end market. here with tremendous opportunity in terms of volume. That one our own fill 2 fabs. So we are in a privileged position. We have the technology and the capability. We can leverage our opportunity both by selling product and by collecting licensing. We can also do it by bringing about we're pursuing all these opportunities evolve.

Got it. So I just want to make sure I understand. So the customers that you mentioned before, they're still on the hook. They're still talking to you. They're still engaged with you. They still can't find an alternative source to power their new AI processors, but it sounds like it just slipped a bit.

Well, I think if you were to ask them, they would all say that they will find a solution, but not the driver exists, right? Nobody will acknowledge that they're out of luck without us. And that's not the real world. That's not what we're suggesting. There's always some way of getting something done. But to be clear, that way of getting it done is problematic in terms of the technical trade-offs and technical challenges, whether it's cooling or manufacturability. And then it may also be very much challenged from the IP perspective. So it's a complex landscape, but...

It sounds like it's still a competitive situation then.

Well, it's always beneficial competitive.

Yes. Got it. So my follow-on question is, are you seeing any AI processor designs with horizontal or horizontal vertical besides your lead customer?

So I think if you look at -- as Patrizio actually said, there's one very, very large company that's using vertical power delivery today in very high volume, and that's increasing year-on-year. In terms of anybody else really in high-volume production, it's with vertical power delivery, John, it's fairly limited right now. They're all trying to get Gen 1 VPD to work in some fashion. But to date, I'm not hearing anybody that's deploying that in volume. They're trying. They're working on it. But I think when we come out with our Gen 5 and launch it and selectively launch it, as we've talked about, we're going to have some winners on our hands.

Got it. I saw a picture of a new AI processors coming out that had -- it looked like a gold bar on the top. And that's why I ask about horizontal. I'm wondering if you have any upcoming horizontals or horizontal verticals besides your lead customer because I know they're different.

So I don't think we're going to make comments specifically about that stuff. I think what do you say about that?

We do have Gen 4 customers using our gold bars collaterally...

But I don't think the visibility to a gold bar is really what's fundamentally add issue at this point. I think the way of looking at it is that we have tremendous opportunity, and we have the technology that matches the needs of the marketplace. Again, going back to the earlier question, it's not that if our solution didn't exist, there wouldn't be a solution. But the alternative solution, which is really a common to all the competitors that tend to do pretty much the same thing with relatively slight differences as they look over each other's shoulder to make incremental steps down and all the road. It carries a lot of baggage in a number of respects, technical and when it comes to APD, also IP challenges.

And our next question comes from the line of Jon Tanwanteng of CJS Securities.

Earlier, you mentioned that you were taking capacity reservations for your facility. I was wondering what the financials of that look like? Is there an upfront payment? Are there contract terms for minimums or something like that? Just how are you approaching that -- those reservations?

So in terms of revenue recognition, that would happen as shipments take place. Obviously, there's a cash component that would show up in our balance sheet. But there is no acceleration of revenue that comes from the capacity resubmission. The revenues get recorded as products ship covered by that resubmission.

Okay. Got it. And then can you talk a little bit more about the 800-volt data center opportunity? And if you are seeing any traction there? Or are you seeing any orders ahead of that? And I'm specifically talking about products that are outside the vertical lateral power or the NBMs that you have today?

So we have technology there. there too, Lagos pioneered high-density past conversion from 800 volt and 400 volts for many, many years. We have relevant IP. We have products. We have more products in the pipeline that will come out later this year. Frankly, though, I would say that there is quite a bit of hype about this 800-volt. I think that it's, to some degree, missing the point with respect to what the real issues are. It's a diversion. The reason why generations of GPUs have not been able to meet the expectations with respect to performance having to do with the power system gating the GPU performance not to do with 48 volt or 800 volt they had to do with what goes on at the point of load and the fact that multiphase mainstream type of solutions are handicap. That's where the funnel should be. So obviously, we operating an industry that goes through phases of focus and progress and potential life. Without question, there is value to 800-volt bus. But that value probably if you measure in terms of efficiency, gets measured in a few percent. gets lost in an inferior point of solution is 15 or 20 points. So I personally wonder why anybody would worry about capturing a 3% improvement in 100-volt power distribution when they're missing 15% or 20% in the point of load and they can't call or deliver the power they need in order to achieve the level of performance they targeted. But irrespective of how these things evolve, we have the technology, we got the IP, and we're going to make the most of the opportunity. But frankly, I think there's going to be a lot of hype relating to as. And that could lead to problems because if people are focused on the wrong problem, which is not really mature problem, they are going to be solved in realms.

Our next question comes from the line of Quinn Bolton of Needham & Company.

Patrizio, I guess I just wanted to sort of make sure everybody on the line is sort of thinking about the revenue ramp the same way. You haven't obviously guided revenue for '26, but you've given us sort of 3 kind of guideposts, which are you expect Andover to become or to approach full utilization over the next year. You sort of said full utilization would be around 80%. Otherwise, you don't leave a lot of room for error. -- you said at 100% utilization, the fab would be able to produce $1 billion in revenue. And so when I put all of that together, it sort of sounds like you're pointing revenue could approach an $800 million product revenue could approach an $800 million run rate over the next year, and that would be more than double what you did on a product revenue front in calendar '25. I know you're not giving guidance, but some of those guideposts point to very significant revenue growth. And I just want to make sure to the extent that you think that interpretation of the comments you've made is too aggressive. I just wanted to see if you would correct any of those thoughts or if that's the right way to be thinking about sort of the data points you've suggested.

I think your analysis is on point. Obviously, key to that is run rate, as you think from revenues for this year, '26. So we see the demand getting to a run rate that would utilize 80% or so of the capacity in facility. Another way of taking this is that we see this year as being one of major increase in product revenue, well above the rate of last year and at a level that we haven't enjoyed for quite some time. And that's pretty much baked in at this point based on bookings that we received and additional bookings we expect to come our way as the year progresses.

And our next question comes from the line of Richard Shannon of Craig-Hallum Capital Group.

Let me ask a couple of follow-on questions here. My first one is on licensing here. Patrizio, following up on an answer to one of the prior questions here, you mentioned about having a couple or specifically 2 licensees so far. As we think about growing the licensing revenue stream this year, and if you can comment beyond that, that would be great in terms of kind of your general expectations. But how do we think about adding to the customer list here versus number of licensees or licenses per licensee or other dynamics that help us think about this? And I guess, specifically, if you could address if things went well for you, what's the kind of number of major licensees would you have? I don't know if this is 3 or 5 or 8, but if you can just characterize that in any way, that would be helpful.

In the high-end computing AI market, I think in terms of substantial licensees, it would be half a dozen. So 3x as many as we currently have in that market. minor ones on top of that. And by the way, the focus has been and the actions of the ITC thus far have been focused on high-end computing, but there's infusion going on in other markets as well. So there's a lot of opportunity, not just for the NBM technology, but for other technology that pioneer...

Okay. My follow-on question is wondering if there's any way that you can help us think about -- specifically about your second-gen VPD technology, how do we think about content per XPU? And I'm going to offer a couple of ways maybe to think about this. I know you're not going to quantify in any specific way, but I think a lot of us who cover this name for a while have a decent idea of what that content looked like a few years ago in your last really high volume or potential high-volume win that you had in point of load. But also since that time, the level of power and the level of current in leading XPUs, particularly getting to reticle limit, are increasing a lot here. So do we think about the kind of the content opportunity now as kind of being proportional to power current? And how do we think -- how would you have somebody think about what that might look like on a per unit basis?

So as I look back at a power system for GPUs a number of years ago, that was in one way of looking at it, about $100 million per year type of opportunity rising. We are locking into an opportunity that will double that. And to Phil's earlier point, there is a hyperscaler with an opportunity that could be another. I don't know if that answers your question.

Mine was really more on content per XPU, but the way you characterized it is also helpful. But any ways you might think about it on a per XPU basis would be helpful, too.

Yes. So Phil, do you want to take that?

Yes. I think, Richard, to your point, it really depends on the current that XPU, the number of rails, that type of thing. So I think that the opportunity for us will be somewhere between $200 to $400 per XPU. But very much depends on, right? So...

Take that with a grain of salt.

Understood. That's getting us a half order magnitude is very helpful.

So Richard, just clarify, it's about like a 2,000 amp up to a 4,000 amp type of product.

Our next question comes from the line of A. Hicks of NC Capital Management.

I just wanted to confirm it's $1 billion capacity now.

I think we lost part of your question. I think the question was you wanted confirmation of the $1 billion capacity of Fab 1. Was that the question?

Yes. Yes, just for Advanced Products, nothing else.

Yes. We are very confident that we can generate upwards of $1 billion worth of revenues out of.

Okay. Because I'm looking at what your sales were for just for Advanced Products, not -- without royalties for the year was around $200 million. Is that for 2025?

Yes.

Okay. So you're saying within a year or so, you could be at $800 million in Advanced Products?

As suggested in an earlier question and confirmed by me, that would be a run rate.

Okay. And then on the bricks, the original bricks fab, could that be converted in the future to Advanced Products?

So no, the bricks much older products. They've got a very stable, if you like, customer base. So some of those customers are moving to advanced products, and we've had quite a bit of success of that in recent years in some higher volume end markets, but aerospace and defense and some very broad-based industrial, they like the bricks. They're going to stay with the bricks. So the brick piece will be fairly stable over the next few years. I...

Bricks don't really play a role with respect to capacity. They become -- well, business, they become.

Okay. But you're also adding capacity to this first fab. Is that correct also?

Yes, we are. Yes. So that's right. We're adding capacity incrementally to the existing footprint.

Okay. And then did you say you're in discussions with a partner to have them produce products themselves?

Yes. So we are having discussions. So we -- this may take some time because it's an important decision selection. But we have customers that want us to have an Altair source. We see the benefit of an Altair source in terms of expanding the market opportunity. If you just look at AI, there is so much of a market opportunity that frankly, there is no way that Vicor alone could do it even with the second and third fab. So we need to, in effect, look at making the most out of the opportunity as opposed to limiting the scope of the opportunity by wanting to do it.

Then I was just kind of curious, how many panels can you produce in a day out of the factory you have now?

I'm not going to quantify that for competitive reasons. I will just say that in terms of the revenue opportunity of the fab, Fab 1 is slightly above $1 billion a year.

Our next question comes from the line of John Dillon of DMB Capital.

I'll make this quick because I know we're up against the time line. First of all, Patrizio, thank you for answering Quinn's question. That was one of my follow-up questions also, and I appreciate that answer. My another one is just a quick one. We're halfway through the quarter, and I'm just wondering how bookings are looking so far this quarter.

I mentioned in my prepared remarks, John, that the book-to-bill was 1.2 in Q4, and we're above that already in Q1.

This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day, everyone, and welcome to Vicor Third Quarter 2025 Earnings Conference Call. [Operator Instructions].

Please note that this conference is being recorded.

Now it's my pleasure to turn the call over to the Chief Financial Officer, Jim Schmidt. Please proceed.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2025. I'm Jim Schmidt, Chief Financial Officer, and I am in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing.

After the markets closed today, we issued a press release summarizing our financial results for the 3 and 9 months ended September 30. 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 as the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for the 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 2024 Form 10-K, which we filed with the SEC on March 3, 2021.

This document is available via the EDGAR system on the SEC's website. Please note this information provided during this conference call is accurate only as of today, Tuesday, October 21, 2025. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call, and you should not rely upon any such statements after the conclusion of this call.

The webcast replay of today's call will be available shortly on the Investor Relations page of our website. I'll now turn to a review of our Q3 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 changes for P&L and balance sheet items and refer you to our press release for our upcoming Form 10-Q for additional information. As stated in today's press release, Vicor recorded product revenues and licensing income for the third quarter of $110.4 million, down 21.7% sequentially from the second quarter of '25 total of $141 million which benefited from a $45 million patent litigation settlement and up 18.5% in the third quarter of 2024 total of $93.2 million. Advanced Products revenue increased 8.2% sequentially to $65.5 million and Brick Products revenue increased 26.6% sequentially from $44.9 million.

Shipments destocking distributors increased 39% sequentially and increased 6% year-over-year. Exports for the third quarter decreased sequentially as a percentage of total revenue grew approximately 42.8% from the prior quarter's 51.9%. For Q3, Advanced Products share of total revenue decreased to 59.3% and compared to 63.1% for the second quarter of 2025 with Brick Products share correspondingly increasing to 40.7% of total revenue.

Turning to Q3 gross margin. We recorded a consolidated gross profit margin of 57.5%. A 780 basis point decrease from the prior quarter primarily due to the benefit of the $45 million patent litigation settlement in the second quarter. Q3 gross margin increased 840 basis points from the same quarter last year.

I'll now turn to Q3 operating expenses. Total operating expense decreased 8.9% sequentially from the second quarter of 2025 to $42.6 million. The sequential decrease was primarily due to the increase in selling, general and administrative expenses primarily attributable to $5.1 million of incentive legal fees associated with the patent litigation settlement in the second quarter. The amounts of total equity-based compensation expense for Q3 included in cost of goods, SG&A and R&D was $1,024,000, $2,117,000 and $1,221,000 respectively totaling approximately $4.4 million.

Turning to income taxes. We recorded a tax benefit for Q3 of approximately $5 million representing an effective tax rate for the quarter of negative 21.4%. The company's tax provision and effective tax rate for the quarter ended September 30, 2025, was positively impacted by the one Big Beautiful Bill Act back during the quarter, which resulted in the beneficial immediate expensing of domestic research and development investments.

Net income for Q3 totaled $28.3 million. GAAP diluted income per share was $0.63 based on a fully diluted share count of 44,930,000 shares reduced by share repurchases within the quarter.

Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $362.4 million of Q3, an increase of $23.8 million sequentially and net of approximately $15.6 million in share repurchases during the quarter. Accounts receivable, net of reserves, totaled $53.3 million at quarter end, but we have those for trade receivables at 38 days.

Inventories, net of reserves, decreased 3.3% sequentially to $92.3 million. Annualized inventory turns were 1.9%. Operating cash flow totaled $38.5 million for the quarter. Capital expenditures for Q3 totaled $4 million. We entered the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $8.3 million and with approximately $2.4 million remaining to be spent.

I'll now address bookings and backlog. Q3 book-to-bill came in at 0.98 and and 1-year backlog increased 1.5% from the prior quarter, closing at $152.8 million. As we discussed during the strategy update at our Annual Meeting in June, Vicor's IP licensing is a high-margin, high-growth business. In Q3, we reached a licensing revenue run rate of nearly $90 million per year. Over the next 2 years, we expect to substantially expand our licensing business. As Vicor IP is, will be used in most AI application necessitating additional licenses, renewal of existing licenses, more expansion of their schools.

At the core of our IP licensing business, we have a power module business that leverages our investment in the first chip foundry based here in Andover. The challenge of bringing this fab with its unique patented processes, online is now behind us with yields and cycle times at world class levels. While fab utilization remains low, as reflected in low product margins due to under-absorption, we expect that performance levels achieved by fifth-generation chip second-generation VPD will soon bring about substantial capacity utilization.

As we said on last quarter's earnings call, 2025 is a year of uncertainty and opportunity. As of today, the quarterly and annual outcome in terms of top line and bottom line with a record results, profitability and EPS in 2025. Given uncertainty in the timing of additional license deals, we are unable to provide quarterly guidance.

With that, Phil, will provide an overview of recent developments, and then Patrizio, Phil and I will take your questions. I ask that you limit yourselves to one question and a related follow-up. But we can respond to as many of you as possible in the limited time available. If you have more than one topic to address, please get back in the queue. Phil?

Thank you, Jim. My remarks this quarter are focused on data center and AI power system requirements and the market opportunity for Vicor's chips and second-generation vertical power delivery. To support advances in AI capable data centers and specialized AI factories, power delivery networks need to supply hundreds of kilowatts per rack and thousands of amperes for every GPU, TPU and network processing.

Advances in power density measured in kilowatts per cubic inch at the rack level, and advances in current density measured in amperes square millimeter at the processor package level are gated by conventional power distribution architectures, such as the intermediate bus architecture or IBA and voltage regulators, such as VRs and IVRs. Performance limitations of conventional power system technologies using IBA, VRs and IVRs affecting critical AI metrics of cogens per second and latency as OEMs and hyperscalers have to throttle back processor speeds gated by significantly limited power system technology.

Unable to meet performance expectations, power system engineers at leading OEMs and hyperscalers are working in opposite and inconsistent directions. To provide efficient power distribution within racks, that data center or AI factory, they are raising power distribution voltages to 800 volts. However, to power the processor socket at a core voltage below one volt, they are relying on VRs and IVRs requiring an intermediate bus forage as low as 1.8 volts. Unlike 800-volt, our distribution at 1.8 volts is inefficient and requires low output voltage bus converters that are also inefficient.

Raising the intermediate bus voltage improve bus converter and power distribution efficiency, but it would do so at the expense of VR or IVR efficiency and current density. In other words, VRs and IVR suffer from an inherent tension between conflicting requirements. It is a game of picking your poison without achieving adequate performance. Not surprisingly, VRs and IVRs are current density limited to 1.5 amps per square millimeter while GPU and TPU roadmaps call for current densities above 3 amps per square millimeter.

Because of low current density, first-generation vertical power delivery using VRs necessitates complex stacked assemblies whose mechanical and thermal challenges are compounded by bus converters having to feed kilowatts of power at a low inefficient bus voltage. And of Vicor's second-generation VPD enabled by Vicor's fifth generation current multiplier technology with up to 24x higher current gain than VRs and IVRs in a 1.5 millimeter thin thermally adept package with up to 5 amperes per square millimeter peak current density.

Thanks to this high current density, Vicor's Gen 5 current multipliers avoid the need for a VPD gearbox, including a stacked layer of capacitors, enabling VPD solutions which are much thinner and lighter, easier to cool, inherently more robust and far more scalable. These figures of merit could not have been achieved without Vicor's unique vision and its ability to overcome technical barriers through innovation and invention, which are also reflected in its first $1 billion chip fab.

I am happy to report that our Gen 5 vertical power delivery solution while Vicor's lead customer has met target specifications and is now progressing to a Q1 2026 production launch. Engagement is starting with selected customers comprising a hyperscaler and OEMs we informed us that Vicor's second-generation VPD is the only solution that can meet their processor requirements. In view of these developments, our confidence in our business strategy of innovation, customer focus and market focus is higher than it has ever been. We're now ready for your questions.

[Operator Instructions] And our first question comes from the line of Quinn Bolton with Needham & Company.

Teresa Phil and Jim, congratulations on the nice results and especially on the IT licensing side of the business. I guess I wanted to start there on IP licensing. Royalty revenue more than doubled quarter-on-quarter. And I'm just wondering if you can give us a little bit more detail as to what drove that increase? Did you guys sign additional licenses in the quarter that generated higher royalty? Were you able to come to terms with one of your existing licensees about royalty payments on their latest generation architecture just -- any color you can give us on what drove that increase would be super helpful. And I guess the follow-up question is, would you expect that royalty revenue to continue to trend up? Or were there perhaps some back quarter payments included in the third quarter licensing?

So to your point, we're able to come to compromise and accommodation with an existing licensee who took an additional license for a time period of 2 years is some of that 2-year time frame, to your point is in the past. So within the quarter, we recorded the payment that includes a catch-up from a few months of the year. There's going to be recurring payments every quarter. And in terms of answer your question as to where licensing income is going I think as we commented in the press release yesterday, our licensing income is going up substantially, as Jim reported in his prepared remarks, we expect licensing income to grow at the rate that could be of the order of 50% a year.

We have line of sight to doubling our licensing business within a couple of years based on a combination of factors and actions that we are preferring to execute.

That's great. I guess the second question for me, just on the licensing or the IP-related royalty. I believe in the past, you've said that certain licensees or certain licenses that you grant may also include product revenue such as your NBM modules as part of the license agreement. In the press release yesterday, where you talked about the $300 million of IT-related revenue, is that just the litigation settlement plus the royalty income? Or are you including some portion of NBM or product sales in that $300 million related to license agreements?.

In that figure, we're including some of the module business that is in effect related to the licensing deals. So in terms of gauging the licensing business by itself without including the module component, I think we can point to the $90 million run rate achieved in the third quarter as the current level of, if you will. The licensing business component of Vicor, which at this point in time, I would submit, she no longer be viewed as just a module maker, but should be viewed in terms of assessing its value as the combination of 2 businesses, the licensing business that is growing very rapidly.

It's got some lumpiness to it, we've got a lot of opportunities upside on the one hand. And a module business supported by $1 billion plus fab, one of it's kind in the universe. That's not been growing, but it will be growing based on the performance levels we achieved with our second-generation VPD, which as Phil reported in his prepared remarks, fits a need, fills a void that is very much a subject of concern a limitation in the AR world.

Our next question is from John Tanwanteng with CJS Securities.

Congrats on the strength in the IP and licensing business. I was wondering if you could talk a little bit more about the strength you saw in the quarter. Was it only from one customer that you came to times what that caused the sequential jump? Or was there other licensees that you signed up and other royalties related to that?

So I guess as we look back at what has come about this year, on the eve of the nation from the International Trade Commission, our first ITC case, which, as you know, resulted in exclusion order prior to that we signed up a substantial hyperscaler. So that was in general. We then settle dispute with one of the respondents in the ITC case. So that and into our second quarter performance. In the third quarter, we -- as I mentioned earlier, entered into a second license with an existing licensee, the first license. So that's been the progression today.

Okay. Great. That's helpful. And then I was wondering if you could talk just about bookings for the next quarter and a couple of quarters. You had a nice step-up in the book-to-bill, just backing into it. Is that just the catch-up from the tariff headwind that you face? Or is there more organic demand there underlying that?

Well, so depending on end markets, there is a different level of activity. Phil can tell you more about that in a moment. But from my perspective, we've been allowed in terms of growth in product bookings and shipments for a combination of reasons, which effectively addressed the delivery of generation components and second generation vertical power delivery.

So as suggested in Jim's earlier remarks, we expect to fill the fab as we do that and no longer suffer from significant underabsorption having in fact, put a lot of capacity in place in this situation of demand. We're going to see all these parameters grow substantially. Starting with bookings, backlog and the top line from [indiscernible].

Yes, Jon, as I mentioned on the last call, I see the base business, as we call it, industrial, aerospace and defense, I mentioned that I see that strengthening as we go through the year, and that's what happened in Q3.

Our next question comes from Richard Shannon with Craig-Hallum Capital Group.

Taking a couple of my questions as well. Maybe I'll address kind of a 2-part question here on the IT revenues here. First of all, I'd love to get a sense here of how many customers are -- do you have license now? And I certainly understanding that 1 of them has 2 different licenses. How many that you might expect here over the next couple of years or so?

And then last call, you talked about the potential and actually, I think you talked about this in the shareholders' meeting as well. But the potential of seeing as much as $400 million worth of return on litigation investment through the end of 2016. You didn't use that language today, although previous answer from Patrizio suggested that's the case. So I just want to confirm that that's possible?

Okay. Let me start with the last one, and I'll go back to the first. So -- with the progress made as we came through the first, second and third quarter of this year with licensing deals done in every quarter. Our expectation with respect to total returns from what we call WIGO, our first ITC action has been growing. And we've been able to raise our target for returns, not just today, but through the end of next year and after that.

One should understand that the existing exclusion order will remain in effect for the life of the patents. It will affect -- and this is a very important point, not just those parties, which were, in fact, exactly involved in that case. But because of dependency on contract manufacturers that were respondents in those decades, it will affect from the foreseeable future. Any other OEM and upper scale that is dependent on those infringing products.

Let me go to the other part of your question with respect to many licensees that we signed up many do we first by addressing the second part. We expect in the next couple of years to sign up each OEM and each hyper scaler in the as space, in the center space. Now that's not going to be easy. But given our visibility with respect to the car road maps, the existing solutions, the coverage of our comprehensive plan portfolio over various aspects of bus conversion as bus conversion over a wide range of voltages. All the way to the point of load with respect to federation of VPD, which date invented, but chose not to practice because of it 's limitations. I don't see any hyperscaler or OEM with a solution being able to do without biopower system -- we have very well to that. And obviously, it's been very effective strategy to assert IP, protect our innovations. And get compensated for it. And I see that they continue to stand in involving the entire marketplace of OEMs and hyperscalers.

Okay. Great. I want to follow up on a response to a prior question here about engagement with second-gen VPD here. And I think if I caught it correctly, you talked about being engaged with an OEM and a hyperscaler. I wonder if you can provide any more details on how long this has been going on applications that you're working with? And how long you expect the qualification process to last?

Richard, it's Phil. So I'll take that one. So we have been very, very laser focused on our lead customer, right, as we brought the technology through. And now we're very close Q1 of next year to production. So we have been talking to pretty much everybody in the industry. But what we've done now in terms of the second phase of our VPD launch is to really focus in on 2 or 3 companies, hyperscaler and a couple of OEMs that offer major, major growth. They have huge potentials because of their scale in terms of both the hyperscale and their reach as OEM sort of chip manufacturers.

And we've been talking to them for a while. And they have obviously been working with others in the industry, looking at their VPD solutions, infringing VPD solutions albeit, but they have not been able to meet the specifications that they've put forward to the competitors so-called competitors of Vicor. So they're very, very excited now that we're ready to engage -- and Q4, we'll see that happen in earnest. And in terms of when I believe we will get to market in terms of sort of pre production, it's probably the second half of next year.

And towards the end of Q3 going into Q4.

Our next question is from John Dillon with DMB Capital.

Congratulations. It's really good news all around. Phil, I've got a follow-up question to Richard. And that's the second-gen VPD deliveries to your lead customer. Have you achieved the 133% solution yet? Or when do you expect to.

I'll take that one. So to date, we delivered units to the regional target. We're working on the 13%. We just taped out a device that will enable us to get there. We're going to have initial samples of that device in January. So we're a way to the set goal of 13%. But thus far, we met the goal of the current requirement.

And then John, let me just add to that, that the -- even the 100% goal that we fit with our lead customer is PAUSE significant enough to get design wins with these other customers I'm talking about, all right? So we're so far ahead even of the competition. PAUSE that they're looking at Vical because it's not just current density, I mentioned the thinness of the package. They're also telling us they need solutions below 3 millimeters in height, PAUSE and no 1 is able to do that. They're all at about 5 millimeters. So that's a critical spec as well. We hit that 50% smaller than what they want. So PAUSE Again, they're very excited.

And what we've got is good enough to get going. And then we'll just up the bar as we bring the 33% through.

Let me add a comment to that regarding thickness, right? So VR solutions with gearboxes and so on and so forth are quite big, several millimeters, quite clumsy, thermally act as opposed to that, very difficult to thermally marge very costly, not in unity reliable. There are IVRs, which are and are capable of up to about 1.5 amps per square millimeter current density. But they are challenging in other respects, which is in order to achieve the labor density, they need to be supplied with 1.8-volt, which at high power levels implies a huge currency PAUSE the need to get delivered at such a low voltage, very close to the point of load. And that was 1 of the points that feelings prepared remarks May. So the predicament for any customer seeking a VPD solution and looking at conventional approaches PAUSE ranging from traditional VRs to IVRs, which is, in a way, a renewed attempt a debt which entail did with fiber many, many, many years ago, right, with very mixed results.

They have relative to one another, certain advantages and disadvantages in particular, the VRs are typically power nowadays from 5 or 6 volts. So power delivery to a VR is not quite as challenged as 1.8 volt. But then the VRs are thicker in terms of our solution, they must run at a much lower frequency they've put due this age. So that's feels point with respect to peak poison. If you want to raise the intermediate bus voltage in order to get somewhat more efficient power distribution, your challenge in the voltage regulator, which works on an average in principle, it's dividing a voltage by fundamentally mixing a dead voltage source with ground. And as you raise the level of ages as the upper voltage gets close to ground, you have to operate with a very low duty cage, which is inefficient.

Or in the alternative, you make the recycle efficient, 50% or so by going to an IVR, but then the problem is you can't efficiently feed the IVR. And fundamentally, the issue is that whether it's VR or IVRs, donator game. And they insert a loss in the case of IVRs, which is upwards of 10%. And for that loss, you only get factor to target, which is nothing if the GPU, TPU is thousands of on peers, right? I think it's been noted that the typical house power inlet is 150 apps.

Obviously, it's a much higher voltage and that you can power hole us. But the challenges of distributing a 1.8-volt are a significant handicap with respect to IVR. So they all have their trade-offs they're all fundamentally constrained by the same laws of physics, which are lacking car game, make them somewhat handicap with respect to keeping up with processor road maps and process of current density requirements.

Yes, I get that. Because homes law, the low voltage is really going to be a handicap for them, and they're going to have incredible transmission losses and extra heat that they've got to remove. So I get that. It's good. That's a great explanation.

It's not just Amselo.It's kickoff lows. There's a few roles at play. But the bottom line is the up against those are physics which are not changing, right? Italy, they can make a trade-off or make a different trade-off. The gain in one respect, but then they losing another. And that's the dilemma that is ongoing with respect to that approach to powering AI.

Got it. My follow-up question is pretty simple. It's -- I thought I heard earlier that you said production quantities in Q1 for your lead customer. But then later on, I heard Q3 or Q4. So I'm wondering if you could just clarify, I don't think I've heard that correctly.

I think we're talking about different capital...

Customer. Yes. Yes. So lead customer is Q1, John, and I now was talking about other customers next year in the second half, end of Q3, Q4 for other customers. For production...

How are you getting from prototype to production so quickly? That's incredible. I mean that's really fast..

Okay. Well, so The pro metrics with respect to current multipliers, a tire or lower current levels is extremely scalable. We're going to have compete make up ready for sampling. And then when it comes to the adoption time line, it's to a high degree, accelerated by the need for a solution lacking acceptable alternative solution based on conventional technology, again, and an IP architecture. That's handycapping solutions. I can tell you that even though subsequent generations of have used blacker technology, at least for bus conversion, now now then as in terms of its power system, deliver the requisite power car level that the silicon team had targeted. And this is compromise that is very challenging, clearly, particularly as the space gets more competitive with, obviously, some increase in credible threat of competitive alternatives.

Yes, John, I'd also like to say there's lots of stuff going on in parallel, and there's nothing like having your own vertically integrated chip fab. We are in full control with short cycle times, right? So there's a lot of other things going into that and are advantageous for us getting to production include next year.

I'd just like to add to what Phil has said, which is the cycle time and it might be an opportune time to mention how different Vicor is now compared to a couple of years ago. So we have an internalized fab. We have very, very short cycle times. We have great yield fantastic inventory control, quality control and on-time delivery, all the metrics that you care about operationally are really now in a place that we're very, very happy about. It's a big deal for Vicor.

And I think that at 1 point I made in my prepared reabsorption on the product revenue side is suppressing what would otherwise even be higher margins for the company. We make great standard margins because the pricing captures value but because we're not lowering the factory, we're curbing under absorption variances. So that's a future state for us to all be very optimistic about.

Our next question comes from the line of Patrick Corners with Ajax Capital.

Congratulations on a good quarter. I know defending your IP has been a slugfest. So congratulations on the hard work. As you go into production in Q1 for your lead customer and a potential large hyperscaler in the horizon, are there any concerns about deploying the second source or had any pushback from your current clients or future clients about not having a second source? And how are you addressing that?

So there's always been an issue. And will remain an issue. We have ways to deal with that. Obviously, a licensing practice provides opportunity for multisourcing, but to itself doesn't give rise to the know-how and core technology. It is just fundamentally a covenant not to sue a license that ensures that the supply chain is not going to be interrupted by injunction or exclusion order.

But we're open as needed to different business arrangements, including fabs that could be owned with shared ownership and other ways to accomplish what you identified as an issue that has been there and will remain there. So we are prepared to deal with these needs. We understand given the pace of growth in AI that there is a need for multisourcing. You can't have total dependency on any one source. And we're prepared to enable that through the licensing model, which provides flexibility with respect to as well as with respect to the fab that could be replicated in other parts of the world with the lead time of about a year.

Okay. One quick question is you quoted 98% yields right now. Is that at size right now? I mean I don't know how you measure that. Can you give us some kind of clues would that satisfy your lead customer?

Yes, that's a very good yield in this industry. It's a record year for us. It's a great deal. We had to be clear that's for particular model that we make upwards of 100,000 a month. So that will not be applicable to devices that are not in mass production.

Our next question comes from the rain of Quinn Bolton with Needham & Company.

Just wanted to come back on the licensing or the royalty revenue to date. Can you give us a sense, is all of the licensing revenue today just from your power module patents? Or have you started on the 2 or the licenses you have in hand, does that include vertical power or not?

It does not include vertical power. It only stems from the assertion of IP to a few PAUSE certain patents that we have to a VM technology. We have added Pars. We have lots of with respect to VPD power package. Now these have been asserted yet. Now as I mentioned earlier, the first lead or the first leader exclusion or there with respect to those parts or how to change is going to be enforced for many, many years. And it's going to be enforced more broadly as an gone and we identify the customs U.S. customs pinging products manufactured by contract manufacturers, particularly the ones that were respondents in our first ITC case. And again, that can affect other customers of those contracts. And in fact, it's not these kind of developments that led us to the license that was entered into in the third quarter. But all the actions absolutely has been revolving around the very first case.

That's fair for. So a short summary, you will have another opportunity to go back to customers to license the vertical power at the point you choose to serve those patents in the future?

Absolutely. So the hyperscalers OEMs that we've been communicated with over time, in some cases, for 3 years or more. They understand how our licensing practice works. The cost of license in terms of royalty rates is at the level that is very attractive relative to taking a license at a later stage. And we have 7 stages ranging from a stage where there's been no complaint filed, no litigation, rates are attractive to what we go Page 7, which is after the injection or customs stop importation of infringing products into the U.S. There is every incentive for OEMs and hyperscalers to take a license proactively, right? As opposed to playing a game of cash, if you can because if they play that game, I think we already demonstrated well cut, and that's going to be very, very expensive.

Got it. And then a quick one for Jim. Jim, you mentioned the 1 big beautiful bill as a pretty nice tax benefit in the third quarter. Can you give us some assistance on what we should be thinking about for future tax rates in Q4 heading into next year? I think previously it may have been in the mid-teens percentage rate. But any help you can give us to the tax rate given the one Big Beautiful Bill?

Yes. So Quinn, I can't really say much about next year right now, but I can tell you that fourth quarter would be low single-digit expectation.

[Operator Instructions] And we have a question from the line of Mr. Neil Gore.

Well, great quarter, guys. On your licensing deals, are they similar to most licensing deals where you get money upfront granting the license then on an ongoing basis, you get a small percentage of the sales?

We actually don't look for money upfront. Obviously, we have all cash and the caseservice are growing, even though we've been buying stock. So we make it easy for OEMs and hyperscalers to. They don't have to put up any money up front that we have to commit to using the license, they are fee to, in effect, pay as you go in one licensing structure depending on the use they make of the technology.

Okay. And the companies that have been licensing from you for more than a year, is there revenue growing on a regular basis? Or is it pretty flat?

So I think we have examples of both. So we have one example with a hyperscaler where the royalty rates increased at about 3% per month. We have another example where the royalty is fixed by quarter for a number of quarters. So -- and this reflects in effect, the fact that depending on the OEM, the hyperscaler, the issues might be different. We're very flexible, not rigid with respect to, in fact, enabling what works best for that particular licensee to be turned into a license.

Okay. And one last thing. About 2 years ago, you said you planning to be a $1 billion company. Most companies have 5-year plans. Are you want to track to achieve what your plan was initially set out far within the time frame that you thought you were going to achieve it?

Yes. So we are almost half of the way there, right? This year is going to be quite good. You can separate to the end of the year at this point given the track record of the last 3 quarters. I think as suggested in answer to questions, going back to maybe about this time last year when I think I stuck my neck out that this was going to be a record year for Vicor going out, as Jim summarized earlier to be a record year in all respects, top line, the bottom line, EPS. But we are not quite half of the way there to EUR 1 billion. So what's going to get us there?

Well, filling the fab by itself would get us just on for revenues past $1 billion. Because actually, the capacity of that fab has been going up, particularly with fifth generation products, our second-generation VPD devices, which being thinner have a faster cycle time and higher capacity per pound through the fab. So needless to say, if we were to fill the fab would be just on the prior revenues beyond EUR 1 billion.

The licensing business as a snapshot in the third quarter is at EUR 90 million run rate. I can't tell you what's going to happen next quarter, the quarter after that. There could be additional licensing deals that may not yet happen. But I can tell you that there's going to be a lot more over the next couple of years as we get additional exclusion orders. And the industry gets realized that if products use Vicor IP they need to license. So those products aren't going to share. So the licensing business by itself, as suggested earlier, from 90 can get to a couple of EUR 100 million dollars. We have line of sight to that within a couple of years. And that's not the end of that growth opportunity. I think it can go well beyond that level.

And we have a question from the line of John Dillon with DMB Capital.

Yes. Guys, I've seen reports that future AI manufacturers, including NVIDIA, are planning processors that will require 6,000 to 7,000 amps. And you're saying that a lot of the power supply companies are having issues with 2,000 amps. So my question is there anything on the horizon that can power a 6,000 processor besides Vicor?

Well, I frankly believe that even at the 2000 level, VRs and IVRs and bus converters delivering the kind of power kilowatts, either at 5, 6 volts, okay, so VR 1.8 volt. Those things are fundamentally challenged. I think if we look at -- GBU companies. They haven't been able to go to VPD because it's really not practical, it's mature. Because it's first generation of VPD, and it's got the complexities that feel summarized in prepared remarks, it requires lots of layers Hard to put together, have to assemble on the back of processor heat getting trapped, lots of issues, even at the level of 8,000 amps, never mind 2,000 or more.

Now there is one large hyperscaler that has gone very far with respect to the VPD. But again, suffering from the same kinds of challenges and difficulty seeing how the GPU, TPU road map in future years is going to be supported by power system capabilities that are already available from multisources.

It sounds like there's nothing out there that we'll be able to handle 6,000 amps. So...

It all depends on us have to be put into perspective, right, for it to be meaningful because to be clear, with our lead customer, we've been supplying tens of thousands of amperes for years, but that's the wafer scale Andrew call engine as of course. Yes. So 6,000 as, if we scale engine will be solving it right there, we're now at the level of 50,000 amps. And in the future, it's going to be higher than that. So it's all relative, right? All these things, there's no try magic about 1,000 apps, 2,000 amps or 6,000 amps 50,000 amps. I think the more relevant metric, right? The figure that matters is the current density. And relating to that, the con multiplication what you need not to get in the way of AI processor road maps is you have to have very high corn density, i.e., several amps per square millimeter and rising number one, and you have to have high can multiplication because if you have iron multiplication, then you're stuck at the entry point to the point of load process, which is fundamentally the ligament of IVRs.

Yes. And that's my point. It sounds like Vicor is the only one who's going to be able to handle these new processors that are going to be running at these kind of amperes.

I'm not good enough to know it's dangerous to make absolute statements, right? Understand.

We don't know, what we don't know.

Not aware of any other company that can address the road map requirements in terms of high enough front density within a multi Vicor is the only company with that technology pioneer that, heavily palate, many, many different perspectives and have just begun to show the industry that anybody chasing our track is going to have serious problem. You might recall me sin in the past that our time portfolio is land mine. We began to see the effect of people stepping over the perimeter of that land on field.

I get it. I get it. And then, Phil, you had answered a question about the NBM sales as a result of licensing contracts with their incentives to take product. What I was wondering is, are we going to start seeing an increase in NBN sales in the next quarter or 2?

Well, I think that the NBMs that we have are super for a lot of different applications. But the focus for us, John, is really as Patricio pointed out, bus converters are useful in a number of applications, but the future isn't bus converters. We'll sell a lot of them going forward, but it's really about BPD and coming in 48 volts to our VPD solution and current multiplication at the point of load, as Patricio just explained. That's the future. That's the growth for the company.

I get that. But I was just wondering, as a result of these contracts, do you expect to see some NBM increases in NBM sales on the next couple.

Yes, we will see some point nice. It's not that the car the strategy.

And ladies and gentlemen, with that, we conclude our Q&A session and conference for today. Thank you all for participating, and you may now disconnect. Everyone, have a great day.

Thank you.

Hello, and welcome to Vicor's Second Quarter Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Jim Schmidt, Chief Financial Officer. You may begin.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2025. I'm Jim Schmidt, Chief Financial Officer; and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing.

After the markets closed today, we issued a press release summarizing our financial results the 3 and 6 months ended June 30. 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 want to remind listeners that this conference call is being recorded and is the copyrighted property of Vicor Corporation.

I want to remind you various remarks we make during this call may constitute forward-looking statements for purpose of 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 those 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, 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 2024 Form 10-K which we filed with the SEC on March 3, 2025. 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, Tuesday, July 22, 2025. 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 webcast replay of today's call will be available shortly on the Investor Relations page of our website. I'll now turn to a review of our Q2 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 changes for P&L and balance sheet items and refer you to our press release for our upcoming Form 10-Q for additional information.

As stated in today's press release, Vicor recorded product revenues, licensing income and a patent litigation settlement for the second quarter of $141 million, up 50.1% sequentially from the first quarter of 2025 total of $94 million and up 64.3% in the second quarter of 2024 total of $85.9 million. Advanced Products revenue increased 1.2% sequentially to $60.6 million and Brick Products revenue increased 4% sequentially to $35.5 million. Shipments to stocking distributors increased 18.9% sequentially and decreased 14.3% year-over-year. Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 51.9% from the prior quarter 60.8%.

For Q2, Advanced Products share of total revenue decreased to 63.1% compared to 63.7% for the first quarter of 2025, with it -- with new product share correspondingly increasing to 36.9% of total revenue.

Turning to Q2 gross margin. We recorded a consolidated gross profit margin of 65.3%, which is a 1,810 basis point increase compared to prior quarter, primarily due to patent litigation settlement within the quarter. Tariff expense was approximately $2 million in Q2.

I'll now turn to Q2 operating expenses. Total operating expense increased 5% sequentially from the first quarter of 2025 to $46.7 million. The sequential increase was primarily due to the increase in selling, general and administrative expenses, which was primarily attributable to $5.1 million of incentive legal fees associated with the patent litigation settlement. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A and R&D was $900,000, $1,790,000 and 1,020,000, respectively, totaling approximately $3.7 million.

Turning to income taxes. We recorded a tax provision to be approximately $7.8 million, representing an effective tax rate fpr the quarter of 16%. Net income for Q2 totaled $41.2 million. GAAP diluted income per share was $0.91 based on the fully diluted share count of 45,77,000 shares. While royalties legal expenses and income from patent litigations have become part of Vicor's ordinary course of business, I will point out that without the patent litigation settlement, net Q2 revenue would have increased by approximately $2 million, gross margin would have increased by approximately 200 basis points, operating expenses would have declined by approximately $3 million and income before taxes would have increased from approximately $3 million in Q1 to approximately $9 million in Q2.

Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $338.5 million in Q2, an increase of $42.4 million sequentially and net of approximately $17.5 million in share repurchases during the quarter. Accounts receivable net of reserves totaled $55.1 million equivalent with DSOs for trade receivables is 31 days. Inventories net of reserves decreased 3.1% sequentially to $95.5 million. Annualized inventory turns were 1.6. Operating cash flow totaled $55.2 million for the quarter. Capital expenditures for Q2 totaled $6.2 million.

We ended the quarter with a construction in progress balance primarily for manufacturing and equipment of approximately $11.8 million and with approximately $3.1 million remaining to be spent.

I'll now address bookings and backlog. Q2 book-to-bill came in below 1 and 1-year backlog decreased 9.6% from the prior quarter, closing at $155.2 million. As we said on last quarter earnings call, 2025 was a year of uncertainty and opportunity. As of today, the quarterly and annual outcome in terms of top line and bottom line is subject to a relatively wide range of scenarios. Given the wide range of possible outcomes, we are unable to provide quarterly guidance until we are further along resolving uncertainties and capitalizing on opportunities.

With that, Bill Phil provide an overview of recent market developments and then Patrizio, Phil and I will take your questions. I ask that you limit yourselves to 1 question and a related follow-up, so we can respond to as many of you as possible in the limited time available. If you have more than one topic to address, please get back in the queue. Phil?

Thank you, Jim. Our second quarter book-to-bill ratio came in below 1 due to order cancellations from customers in China and widespread order placement hesitancy around tariffs. Vicor has instituted a 10% tariff surcharge applicable to all new orders and customer backlog shipping after July 2. This tariff surcharge is now in effect. Earlier this year, we bought to fruition our first ITC action, which has resulted in cease and desist orders against the name respondents and an exclusion order against their customers, both OEM and hyperscalers.

We are pursuing additional actions against companies unknowingly infringing our IP while playing a game of catch me if you can. At the Annual Shareholders Meeting on June 20, I presented an update on our business strategy is fundamentally centered around our top 100 customers, enabling high-performance modular power delivery networks. At the meeting, we showcased next-generation products, providing significant advances in power and current density at levels far beyond our nearest competitors. These next-generation products are being sampled to lead customers across our 4 target markets and customer engagements are expected to expand in Q3 and Q4.

I am pleased to announce that our Gen 5 vertical power delivery solution to a lead customer is coming to fruition with a current density exceeding its original target specification. Higher current density, thermally adapt and scalable VPD will enable us to engage with hyperscalers, AI processor and network processor companies to deliver solutions with superior performance and cost effectiveness. These engagements will begin with the delivery of VPD valuation boards and online selection and simulation tools. As discussed at the ASM, we are also focused on the future AI megawatt rack which will require 800-volt DC power delivery and conversion to 48 volts. Vicor has pioneered high-density non-isolated 400-volt to 800-volt, an isolated 800-volt to 48-volt bus converters for automotive applications. A new 800-volt power module, which will deliver 10 kilowatts at 48 volts in a package smaller than an iPhone will begin sampling in Q4. Vicor will be uniquely positioned to offer front-end 800-volt to 48-volt bus converters and direct VPD 48-volt to sub-1 volt solutions, enabling a high-efficiency, high-density power delivery network for our customers. The market SAM for these solutions is expected to exceed $5 billion by 2027. Opportunities continue to grow in our automotive business. We have just concluded a successful audit with a large European OEM for initial low volume project, and we are now preparing for an audit by a large ASEAN OEM in Q3. It is very clear that 48-volt zonal architectures are the highest growth opportunity in automotive, followed by 800-volt to 48-volt conversion, which will allow us to scale and leverage technologies across our AI and automotive market. The pipelines in our industrial and aerospace and defense businesses are healthy and growing. Our new product introductions will strengthen these businesses and put them firmly on a path to doubling in 4 to 6 years, respectively.

As presented at the ASM, we remain confident in our business strategy of innovation, customer focus, market focus and a successful technology licensing practice. Thank you. We will now take your questions.

[Operator Instructions]

Our first question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the patent litigation settlement. It's a very nice amount. I wanted to kind of start there and at the Annual Shareholder Meeting in late June. You guys talked about a return on the money spent on the ITC case, somewhere in the round number, $200 million range. And I'm just kind of curious, as you look at that kind of return, I assume that that's includes the patent litigation settlement that you just announced, but also just wanted to check, does that include the royalties from the OEM, the hyperscaler licenses just in 2025 and '26 or does that include what you also recognized in 2024? Just want to make sure I've got the time frame right on that $200-ish million return. And then I've got a follow-up.

So that's -- the approximate amount that we have locked in so far, through '26.

Okay. through '26. Got it. Okay. Perfect. And then either Patrizio or Phil, book-to-bill was below 1 in the June quarter. I think you mentioned some hesitancy around the tariff surcharge and just general tariff uncertainty in the business as well as some cancellations in China. Do you sort of feel like the bookings activity has reached a minimum. Have you seen any improvements in July on the bookings trend and any evidence that book-to-bill might be getting back above 1:1 in the September quarter? Or do you see this tariff uncertainty continuing? I know August 1 is an important date for reciprocal tariffs. So just kind of wondering if that tariff uncertainty has continued here in the July time frame.

So Quinn, this is Phil. So we think that the hesitancy around tariffs is now behind us. It's very clear now what we're doing. Customers are working with that expectation and I think that -- as I said, that's behind us now and it's on to future quarters.

Our next question comes from the line of Jon Tanwanteng with CJS.

Congratulations on a nice settlement. I was wondering if you could talk a little bit more about the cancellations that you saw with what end markets those were in. Was that HPC or something else industrial, automotive, aerospace, any help there would be appreciated.

Most -- Jon, this is Phil. Mostly from the industrial market in China, we have customers there for many, many years using a lot of older products as well as some of our advanced products. It was widespread. It came through distribution channels sort of across the board because the tariff there was pretty high initially. So we had some order pushouts and some cancellations, it was a mix. So that's the color on that.

Understood. And second, just on the royalty streams that you're seeing, are you expecting to continue growing those license streams into the future quarters. Is that part of the engagement that you're talking about? Or is that mostly stable for now?

So we completed the first ITC case with [indiscernible] and order that the IDC issued earlier this year. That's still ripping through the supply chain. We are aggressively pursuing infringers that are still trying to import products that are some exclusion. We're also preparing additional actions in the fall. So as evidence said by the track record to date, we are very serious about protecting our intellectual property and nobody should have any doubt that we're going to go to whatever length is necessary to preclude infringement. I believe the message is getting around. But I should say, given the track record of the industry, an industry in which suppliers have been urged by OEMs, sometimes hyperscalers to healthy, successful products. This is a practice that's going to take some time to change, but we have the [indiscernible] to make it happen, and we are very determined to make it happen. So, so far, so good. There's going to be a lot more of what has happened.

Our next question comes from the line of Richard Shannon with Craig-Hallum.

Well, let me ask a question. My first 1 is going to be on this new license settlement. Congratulations on what seems like a very nice win here. Maybe you can describe this in a few different ways for us to the extent you're allowed or able to. Is this settlement -- will we see any ongoing royalties from this customer? Or is it fully paid up in any manner? Can you describe who this is either by name or kind of a company, OEM, hyperscaler, et cetera? I guess just to start with that one, please.

So I cannot disclose any of the details that you're looking for. I can only say that at the shareholders meeting that there's been no license in connection with this particular action. So you should not assume that the parties were involved got a license and by mutual license, they are able to keep doing what may have beensubject to exclusion order and potentially other actions were coming.

Okay. Just as a heads up for -- actually for all of you, I'm getting a little bit of scratchiness from the line here. I'm not sure I'm hearing everything here, but I think I caught most of it. With that said, I'll follow up with my second question here, which is to kind of understand the dynamics going forward in regard to licensing and should we understand that you're not able to fully lay out your strategy here. But as I think Phil said in his prepared remarks about trying to play the infringers are providing or doing a catch me if you can strategy here.

And obviously, it seems like this patent settlement is 1 example of success there. I guess I'd love to understand the degree to which you think this is an example of that and willl stop others? Or are we going to see some back and forth here like what we saw last quarter with the licensee coming off.

So I can describe the strategy. And I think we've made no history with it. The strategy is to protect IP, enforcing it selectively smartly, by fundamentally going after the supply chain that in the pricing industry, as I mentioned earlier, relied on copying successful products. That's been part of some people call the ecosystem. It's an ecosystem that, for the most part, players that don't innovate, they tend to copy each other. And when a successful product comes to market and hyperscalers or OEMs, if they want to have it and have it commoditized. These players will have been [indiscernible]. And so the supply chain starts at the top with the enablers. They enable copycat products. Then there are [indiscernible] incorporate them in higher value assemblies, I'm speaking, much higher value assemblies. And then further down in the supply chain, the OEMs and hyperscalers that, in a way, they are facilitating this kind of practice. we are committed to bringing this practice, at least in so far as IP is concerned, to Are. And that will entail some companies going line down because they know about the IP, they should respect it. And if they don't, there are consequences to buy infringement. One of those consequences [indiscernible] or exclusion of this. And that's what's happened with our first action. There's more of that coming. So the strategy is crystal clear [indiscernible.

Our next question comes from the line of John Dillon with D&B Capital.

Congratulations on a nice settlement, really nice to see. Phil, my question for you is at the Annual Shareholder Meeting, you presented a chart that shared a timeline when you can be delivering Gen 5 vertical to your lead customer. So I'm wondering, is that still on target? Are you still going to meet all those dates? Does it still look solid. And I have a follow-up question after that.

So Jon, I'll take that. So things are progressing well. But we expect the current multiplier piece that has been challenging because of its very, very high current density as well as the other building blocks. So we're still, as you know, as discussed at our shareholder's meetings, very much focused on addressing the needs of our lead customer. We're keeping our powder dry with respect to engaging with other potential customers. But shortly after satisfying the very high current necessity need of our lead customer, we'll be ready as Phil pointed out earlier, with demo system boards, range of tools to see data very scalable adoption side.

So I think the question -- sorry, John, the question was on the slide that we showed. We're still on target with that slide that we showed, John.

Okay. So did you deliver the 83% solution then?

Yes. We have provided relatively significant part is of the 80% solution, which by the way, was the backstop agreed upon with the customer to begin with and we're on our way, making good progress with respect to 100% and 133%.

Excellent. Then my follow-up question would be, when do you expect to have a fully productized product that you can you can produce in quantities for the general market?

I'm going to not spell that out. Again, as suggested earlier, John, we want to stay very, very focused on taking care of our lead customer first. And that's 100% of ours at this point in time. That's not to say that we're not preparing for a general market introduction. As I mentioned earlier, we made great strides in demo systems [indiscernible] and general market capabilities. But we're only going to pull the figure on that once we're done with 100% current level that was initially targeted just before we get 113% reach goal.

Excellent. Okay. I got you.

Just to add to that, just a little bit. That's not to say that the front-end team is engaging with customers from a perspective of understanding their loads. So anybody that's looking at VPD, we're talking to them about their new next-generation processors, networking chips, so forth. So it's not that there's not any work going on. It's just that the front-end team isn't involved in, if you like, the development of the product for the lead customer. So we're able to have the resources available to talk and gather information such that when we do launch that out to the general market, we're ready to hit those customers very, very quickly with solutions that they need. So that work is ongoing, and we've got a lot of engagement with anybody looking at VPD right now.

Will you lead customer be able to shift the product that you're shipping them to their customers? Is the quality going to be good enough that they can actually use it to ship to their customers? Are they still in the kind of evaluation stage.

So I can't give you details obviously, but I can say this. The customer is considering amortizing the platform that we've started to ship, but our objective is to enable a higher level of capability and improved performance and to do so ahead of the customer target market introduction date.

We have a follow-up question from the line of Quinn Bolton with Needham & Company.

Patrizio, at the annual shareholders meeting, you were asked is your outlook for 2025 to be still a record year. I think at the Annual Shareholder Meeting, you had referenced some increased uncertainty around tariffs, but you still thought you got there. Obviously, with the June quarter results and the $45 million patent litigation settlement, it certainly looks like you're tracking to a record year in 2025, but wondering if you had any updated thoughts on whether 2025 is a record year for revenue? And then I've got another follow-up.

Yes. As suggested, I think for a couple of quarters, we do expect '25 to be a record year.

Excellent. Okay. And then a follow-up question. I know you don't provide quarterly guidance, but just wondering if you could directionally give some comments. Your royalty revenue was on a very nice upward trajectory through 2024. In March and June, you sort of pulled back to the roughly $10 million level, and I think you'd mentioned that one of the OEM licenses wasn't paying on a new generation product, but it looks like that royalty income level has stabilized. I'm just wondering, as you look into the back half of the year, would you generally expect royalty to begin to increase again? Or does it stay in this $10-ish million range? Could you give any sort of qualitative comment on how you think the royalty portion of the revenue stream might trend over the next couple of quarters?

We're not going to commit to any specific level. But as evidenced by the results in Q2, I think it's fair to say that in any 1 quarter, there is a great deal of upside on a bigger scale than what happened in Q2. So -- and that's the reason, frankly, why we can't provide a reliable forecast. There is a good deal of variants, different scenarios. And you should say, given a strategy and commitment for [indiscernible], we don't want to be, in effect, committed, hooked on any particular target in any 1 quarter less that the drivers of the leverage we need in order to be successful in bringing about the right output. So that, as you can imagine, has uncertainty, which is, at this point in time, part of our IP business.

I think as we progress further along and we get a more diversified licensee base, the licensing business is going to become more predictable. At that point in time, the kind of challenging forecasting that we presently face will no longer be there.

Maybe just, Patrizio, I understand that like patent litigation settlements are difficult to forecast timing and probably the signing of new licenses to the extent they include a license payment is a little bit less predictable. But royalty payments, I would think on existing licenses might be a little bit more predictable. And I guess that's what I was asking about. I know you had, again, talked about some sort of headwinds in that royalty income with the OEM license.

And I'm just kind of wondering at this level, do you think that those headwinds are now largely behind the company on the existing licenses? I'm not trying to get you to comment on new licenses or patent litigation settlement in the future? Just more kind of wondering if that OEM license headwind that you had previously talked about might be behind you at this point?

It's not behind us. We are enforcing the existing exclusion order, and we're looking at additional actions for, in effect, making sure that the use of our IP does not go without appropriate royalties or penalties for not paying royalties when they were due.

Our next question comes from the line of James Liberman with American Trust Investment Services.

Great results. It's good to see the licensing and the settlement income coming in. You mentioned the automotive area. An event for the company in Europe and Asia. And in the past, you've mentioned you're seeing some continuing strength in the electric vehicle market in China. Can you give a little bit better overall color to how you see that playing out

Yes. So the automotive market, I mentioned at the Annual Shareholders Meeting, it's pretty obvious to people that have dealt with the automotive market. You don't just enter that market. It's a hard slog. It's a grind. You have to really prove yourself as a supplier. So typically starting out with lower volume programs and platforms and then expanding the business from there once you've proven yourself. The critical steps through that sort of collaborations on different power delivery networks with Tier 1s and OEMs, which we've established. We're now going through the audit phase with a number of customers, that's a very critical step where they have teams that come in and look at all our quality systems and manufacturing systems and product development system.

So we're going through those now. So we're well on the journey, no pun intended to becoming established at least as a lower volume platform supplier, but those do expand then fairly quickly after that. So we're very early days still. I think there's still ways to go before that becomes a significant piece of our revenue probably out in the '29, '30, 2030 time frame, but we are excited about the activity that's going on there.

Our next question comes from the line from -- a follow-up question from Jon Tanwanteng with CJS.

A couple of months ago, the largest chip designer in the AI space disclosed their plans for 800-volt servers and the architectures they plan to use they named a lot of partners in the press release there. And I was wondering, since you weren't on the list that was announced, if there's an opportunity there at all, does that shut you out? Or is there still a way to participate in that ecosystem either with this designer or with others -- with the products that you have?

So I think as mentioned in Phil's prepared remarks, we have a history of pioneering high-voltage bus conversion with or without isolation, the DL IP at various levels. I think anybody now pursuing high-density power system solutions involving bus conversion from 800-volt to 48-volt or in the general realm is going to be needing our IP or in effect, suffering consequences in terms of inferior power density.

As Phil mentioned, we're bringing to fruition a new high-power module that is a good fit for a lot of these requirements in a 10 kilowatt block, which is very small. It's a small fraction of the size of any competitive alternative that analogy is being developed. So here again, we have a leading technology -- leading power density capability. And last but not least, a lot of significant IP that we think is going to become necessary for high-performance solutions.

Jon, there's a long way between having a high-voltage discrete GaN or silicon carbide product to an 800-volt multi-kilowatt rack published system. So there's a lot of announcements there, but there's a long way from that to having a real high performance, high-efficiency solutions. So we shall see.

And also a lot of misconceptions. Frankly, there is a good deal of naivety when it comes to some of these things. So we've been making 800-volt bus converters for many, many years. we know what it takes, and we're doing it in ways that as measured as an example, in terms of switching frequency and other manual grader than what can be done with GaN fabs or silicon carbide fabs.

Great. That's much appreciated. Last one for Jim, if you could. Just any thoughts on OpEx going forward compared to the current quarter that just ended?

Well, I think we won't guide on that, Jon. But I will say that as I described in the results that if you exclude the $5.1 million incentive legal fee, our OpEx will actually drop sequentially, that was because -- primarily because of a low in the other legal expenses we had to incur in some of these cases. So I think we're in a good state right now relative to a nice balance of operating expense and revenue. I think as things heat up and we go forward with other actions, then we'll see -- and it will be lumpy. I think in OpEx, and we've said that is it going to be the case.

That's the first action in terms of contingency, we have kept up. So we paid out all the contingency fees relating to the traction.

Our next question comes from the line of Don McKenna with D.B. McKenna & Company.

I wanted to ask about the settlement payment, if that represents the entirety of the settlement or if that's an initial payment? And secondly, Jim, I thought I heard you say there was some stock repurchases during the quarter, if that was the case, can you expand on that a little bit, the numbers of shares and price?

I think I'll let Patrizio comment on the settlement.

Yes. So I cannot comment on the specifics of the settlement.

So I think on the share repurchase, I mentioned in the prepared remarks, on the order of $17.5 million worth of share repurchases last quarter and on the order of 200,000 or ish shares repurchased during the period.

We have a follow-up from the line of John Dillon with D&B Capital.

My question was answered.

We have a follow-up question from the line of Richard Shannon with Craig-Hallum.

Great. Taking a couple of more questions here guys. I'm going to look at a couple of different comments you made both today and in past calls as well as the shareholders meeting. The first one is talking about record results for the year, and I heard your answer today. And then you also talked about a wide range of outcomes. As we look at your results today here, obviously, a very large settlement obviously, it creates a very wide range here. But as we -- if we just look at your product revenue, how do we think about what can create these wide range of outcomes?

And I'd like to take the tariffs off the table. You've talked about that today, but how about maybe discussing and kind of giving you some sense of where you see some of these positive outcomes by product as we go through the year that could create a record year even better?

Yes. So to be clear, the major source if uncertainty in the short term is with respect to licensing and litigation practice. With respect to the product revenue, the near term sees us still making poor use in terms of copacity utilization of our first fab, which represents obviously a burden with respect to margins and our level of profitability. Even though we've been making good progress on that front, primarily because of the efficiencies associated with shorter time and greater yields. And that always is ongoing. But on the product front, which is, as I think I noted in my quotes associated with the press release, the product front is obviously very important. We're very much focused on that. We've made tremendous investments advancing state-of-the-art and that's all being reflected in our 5G product capability with, in particular AI, the center opportunities point of load as well as earlier, passing through critical hubs in 48-volt and 800-volt is the kind of product superiority and technology lead that will fill the fab. It's not going to happen overnight. It is something that will take some time. But just to say, we're very much focused on that part of the strategy as well. But that's not where the near-term uncertainty with respect to quarterly top line and bottom line numbers.

Okay. And I guess just following up on that Patrizio. Certainly would -- obviously, you've been talking about second gen VPD and some of the newer products here. But relative to talking about the record year doesn't seem like there's enough time for those new products to have that much of an effect to benefit this year. But I just want to make sure that was implied in your comment there.

They are not going to move the needle big time, but there's going to be progress and certainly a contribution in the second half of the year.

[Operator Instructions]

I'm showing no further questions in the queue. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you.