Vicor Corporation Stock

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2026 Vicor Corporation Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good morning, and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2026. I'm Jim Schmidt, Chief Financial Officer; and I'm in and over 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 and 6 months ended June 30, 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, July 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 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 or our upcoming Form 10-Q for additional information.

As stated in today's press release, Vicor recorded product and royalty revenue for the second quarter of $143.4 million, up 26.9% sequentially from the first quarter of 2026 total of $113 million and up 1.6% from the second quarter of 2025 total of $141 million which included a $45 million patent litigation settlement.

Advanced Products revenue increased 45% sequentially to $94.2 million and Brick Products revenue increased 2.4% sequentially to $49.2 million. Shipments destocking distributors increased 4.2% sequentially and increased 38.8% year-over-year.

Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 46% from the prior quarter's 48.9%. For Q2, Advanced Products share of total revenue increased to 65.7% compared to 57.5% for the first quarter of 2026, with Brick Products share correspondingly decreasing to 34.3% of total revenue.

Royalty income from our most recent license agreement, which provides for $5 million quarterly payments in its first year, and $10 million quarterly payments in its second year, contributed $15 million to Q2 revenue. In view of its accounting treatment, this license agreement is expected to contribute $5 million in Q3 and $10 million per quarter for the following 4 quarters.

Turning to gross margin. We recorded a consolidated gross profit margin of 58%, a 280 basis point increase from the prior quarter. Q1 gross margin decreased 730 basis points from the same quarter last year, which included the previously mentioned $45 million patent litigation settlement.

I'll now turn to Q2 operating expenses. Total operating expense increased 6.1% sequentially from the first quarter of 2026 to $48.2 million, a substantial increase in operating expenses was due to a substantial increase in contingent legal expenses paid out to the law firms partnering with Vicor for the license deal reached in Q2.

The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A and R&D was $897,000 and $2,085,000 and $1,198,000, respectively, totaling approximately $4.2 million.

Turning to income taxes. We recorded a tax benefit for Q2 of approximately $10.9 million, representing an effective tax rate for the quarter of minus 27.9%, the company's tax provision and effective tax rate for the quarter ended June 30, 2026, was positively impacted by stock options exercised in the quarter.

Net income for Q2 totaled $49.8 million. GAAP diluted income per share was $1.04 based on a fully diluted share count of 47,708,000 shares.

Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $453.6 million at Q2, an increase of $49.4 million sequentially. And we're pleased to report that last Monday, July 13, we received a payment from the IRS relating to our application for ChiP Act investment tax credit in the amount of $14.3 million. as a refund from our 2023 tax return. This amount and other tax credit amounts we expect from subsequent tax returns will add to our cash balance in Q3 and beyond.

Accounts receivable net of reserves totaled $78.9 million at quarter end, with [ DSOs ] for trade receivables at 37 days. Inventories net of reserves increased 10.2% sequentially to $104.5 million. Annualized inventory turns were [ $2.1 million ], cash flow provided by operating activities totaled $34 million for the quarter. Capital expenditures for Q2 totaled $11.2 million, we ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $18.2 million and with approximately $23.5 million remaining to be spent.

I'll now address bookings and backlog. Q2 book-to-bill came in above 1, and 1 year backlog increased 26% from the prior quarter, closing at $379.7 million. 2026 is the year in which Vicor's innovative products and technology licensing practice came into focus within the industry. As we bring on incremental capacity, we expect a nearly 10% increase in Q3 revenue and over $600 million in 2026 revenue.

To achieve these growth objectives, we are planning for double-digit sequential increases in product revenue for advanced products.

As we said last quarter, this guidance is based on conservative assumptions about our licensing practice. Specifically, the new licensing agreements may not result until our second ITC case gets to its final determination in 2027.

Additional exclusion orders further restricting importation of infringing computing systems may provide motivation to close new licensing deals on favorable terms. Along with revenue growth, we expect margin expansion. Phil?

Thank you, Jim. At our recent Annual Shareholders Meeting, I presented an update on our company's strategy and objectives. Our financial objectives of $2.5 billion in revenues at 70% gross margins, superseded the $1 billion and 65% gross margin targets set in 2023, which we are on our way to achieving.

Our updated objectives are based on a two-pronged strategy, leveraging synergy between our power module sales and IP licensing practice.

As discussed at the ASM, our power module business is focused on a set of 100 customers across four markets and four regions globally. Within each of the four markets of [ HPC ], industrial, automotive and aerospace and defense, we have customers who are on the cutting edge of high-growth applications with the most demanding requirements for power and current density with high efficiency and signal integrity.

A perfect example of this is vertical power delivery. AI data center hyperscalers and OEMs need vertical power delivery to meet compute density requirements and AI data center performance. The market opportunity is growing rapidly and competitors are challenged to deliver on two key specifications, current gain and current density.

With current gains greater than 40 and current density up to 5 amps per millimeter squared, Vicor's second-generation VPD is way ahead of all Generation 1 competitive solutions.

As discussed at the annual meeting, we will engage with selected customers with development systems and tools starting this quarter. Our objectives for our second-generation VPD solutions over the next few quarters will be to expand our business opportunities with OEMs and hyperscalers wanting to be long-term strategic partners.

Major new product introductions are also underway in our industrial and aerospace and defense businesses, with market expansion now occurring outside of lead top 100 customer opportunities that drove initial module development.

As stated at our ASM a few weeks ago, we are very focused on the successful execution of our business strategy, which leverages our vertically integrated chip fab and [ handover ] as the first of a multiplicity of foundries supporting our new financial targets of $2.5 billion in revenues with 70% gross margins and 40% operating income. With that, we'll take your questions.

[Operator Instructions] and our first question is going to come from Quinn Bolton with Needham & Company.

Congratulations on the nice results and outlook. I guess I wanted to start with the second-gen VPD and just maybe an update on how you're progressing with the lead customer, but also Phil mentioned starting to more broadly sample second-gen VPD to a broader customer base.

Do you still feel like you're on track to secure or ramp designs with either hyperscaler or other OEM customers for second-gen VPD over, say, the next 12 to 18 months?

Yes. So we've completed development with respect to a baseline of 3 amps per square millimeter current density with the initial chipset for our lead customer.

We are now completing demo systems, including a dedicated VPD demo system to showcase with other customers. And we're on our way to raise the bar as far as per square millimeter late this year, beginning of next year.

So I'm delighted with the progress we made within the last several months in terms of reaching initial targets. And we have the road map to expand on that.

And beyond the lead customer Patrizio, would you expect design wins to sort of ramp maybe at this point, second half of '27 for vertical power delivery?

I'm not going to make commitments with respect to specific days. I will say that I was in the valley for this is just last week, but there is a good deal of interest in our capabilities. We've been approached by two companies wishing us to provide a building block that is critical to deployment of [ IVRs ]. We look at that as an incremental opportunity.

The reality of these capabilities -- competitive capabilities that is as you look at the migration of [ IVRs ] from 12-volt to 6-volt to 1.8-volt inputs, is that they're barely capable of delivering the real world largely over 1 amp per square millimeter. That's the message we're getting consistently from people in the on.

When you look at all the factors at play, term of deleting, other factors, the competitive capability is quite limited, barely above 1 amp per square millimeter. And the market need, particularly with respect to were for scale engines, other advanced [ HPC ] system is already above those levels and project it to become much higher in a matter of a few years. And frankly, the industry has no solution for these requirements.

Got it. And then, Patrizio, so just any updates on securing a site with or without building for your second chip fab?

So we have several options at this point. They made some offers. Now them was second up yet, but we have the investment of choice at this point. And we'll probably be making decisions in the last few weeks.

And the next question will come from Richard Shannon with Craig Hallum.

I guess the first one is, Jim, I'd love for you to repeat the numbers regarding royalties with -- I think it was a new license year, something those went by pretty quickly here.

And if you could follow up with just kind of general expectations of how to think about royalties in the current quarter as you -- within the context of the guidance you just gave us of revenues up 10%, please?

Okay. I'm going to -- Richard, I'll reread that paragraph for everyone. So royalty income from our most recent license agreement, which provides for $4 million, $5 million quarterly payments in its first year and $10 million quarterly payments in its second year. So that's a total of $60 million, contributed $15 million in Q2 revenue. In view of its accounting treatment, this license agreement is expected to contribute $5 million in Q3 and $10 million per quarter for the following 4 quarters.

So the revenue is different than the cash collections, Richard, because of the GAAP accounting treatment. The $15 million recognized in Q2 was a result of the termination clauses in the agreement. So we could account for $15 million of the deal in this quarter. And because of the accounting treatment, that will drop to $5 million of revenue recognition in Q3 and then back up to $10 million for the balance of the agreement per quarter.

Okay. I think that answered my question also about the implied guidance there.

And maybe if you can -- maybe I'll just ask Patrizio following up on this on characterizing this customer here, OEM, hyperscaler, et cetera. and whether this has been a past customer as well, please?

I can't comment with respect to the identity of licensees. But I think what we have publicly disclosed, which I can reiterate here is that we have a multiplicity of OEM licensees we scale as of now.

Okay. Fair enough. And my follow-on question is partially based on what I see in the press release and then also true to, I think in your response to one of the past questions here about [ IVRs ], the statement here in the press release about feeding [ IVRs ] with the cereal suppliers an incremental opportunity for Vicor. Would love for you to help me understand that a little bit better here? It seems like you could interpret as an incremental opportunity or could be displacing a full second-gen VPD solution here. So I'd love for you to help us understand that a little bit better, please.

So our technology lends itself to supporting either alternative. Without question, a pure factorized power system is capable of considerably more current density several times more with considerably better efficiency. But that doesn't mean that all applications would go in that direction for a variety of reasons.

One thing that [ IVRs ] do have to be fair, is that they have flexibility. So in applications with a large multiplicity of nodes, a highly fragmented seller nodes, there's something to be said for IVRs in that they do provide a great deal of flexibility, configurability, but that comes a significant expense in terms of insertion loss. 15%, maybe 10%, but then if you try to get it down to a 10% loss, they need to run a lower frequency and they still have transient [indiscernible] issues, which factorized power system no longer has. So we have a huge efficiency advantage relative to this competitive alternatives. But that doesn't mean we can't play a support role for those alternatives and capture significant business.

And the next question is going to come from Justin Clare with ROTH Capital.

So I wanted to touch on the guidance. So updated your 2026 guide to over $600 million here. It looks like the update is primarily related to the additional royalty payments that you had laid out. But wondering if there are any other notable changes relative to the initial guide related to shipment expectations or related demand.

And then just on the new licensing agreement, I wondering if you could share just how that's structured. Is that only royalty payments that you're anticipating from that? Or could you also see greater demand from your fab as a result of that licensing agreement?

So the total revenue growth comes to your point from a combination of new licensing deals. The ones we closed down, specifically the one that was closed in the second quarter, and product revenue growth.

The initial license agreement that was closed in Q2 does not, for the first couple of years, provide for a sourcing relationship, but that's understood to be part of the relationship going forward, in conjunction with our second-gen VPD capabilities. And that's going to be the natural of this relationships going forward. with OEMs and hyperscalers.

Got it. Great. And then just wanted to touch on the expansion underway at your first fab here. Just wondering if you could share an update on the progress, when you anticipate the expansion being completed, and then you had previously talked about being able to reach $1.5 billion in revenue after that -- or at least $1.5 billion in revenue could be supported by the expansion.

But I think that's sensitive to product mix. So just wondering if you could also share just how product mix might affect whether or not you could deliver either above or below that $1.5 billion.

So as reported, we are expanding capacity, but also absorbing that expanded capacity. And as time progresses were inevitably getting close to full capacity transaction with the first chip fab, and that's why we're working to close on a second facility.

The specific number at which the first fab will top out is, I think, yet TBD. To your point, that target as of a year ago was a lot lower than it has been. And our version team is continuing to work to expand it to the extent possible.

But we are in a privileged position that with limited capacity, we have the opportunity to select those engagements that makes sense strategically for the long term. And that's what we're doing. We're not sold out, but we're approaching capacity in [indiscernible]. And as we get closer, at least through the time frame before the second fab comes up, we're going to be very selective in our engagements.

And the next question comes from John Dillon with DMB Capital.

Congratulations on a great quarter. I've got a follow-up to the last question. And that's -- you stated your goal of $2.5 billion in revenue coming up here. And I'm wondering, are you planning on getting there with your existing factory? Or is it going to take a second fab to get there along with revenue plus the royalty income, can you get to $2.5 billion with your existing facility?

No. Okay. That's definitely No, it's going to take a second fab together.

Well, that kind of led into my follow-up. My channel checks are saying that you guys have [ Avago ], Google and AMD. And AMD, we've seen pictures of gold bars in the new processor. So how big are these going to be in the next year? And how are you going to have the capacity to serve them?

I'm not going to comment about sizings of gold bars anywhere. But so near to say, we have a very distinctive product. It's distinctive that is manufactured uniquely in a fab with 3D meter interconnect processes that give it its golden look.

But to be clear, while it's got a golden look, it doesn't carry the cost of gold with it to the contrary. Among other things, we are going to have the lowest cost card. So I think we got exciting years ahead with respect to raising the bar on the revenue line and the profitability along the lines of what Phil was suggesting earlier. But it's going to take a second fab to get to those levels.

And how big will that second fab be? Will it be able to do $1.5 billion? Or do you expect it to be able to do more in revenue?

We are down selecting to size that have the word with all to support a considerable expansion as much as 2x potentially 3x the first fill.

And our next question will come from Richard Shannon with Craig-Hallum Capital.

I'm going to follow up on the last answer you produce, just to make sure I understand it here. So your first model of $1 billion was just with the first fab and as you just heard from your answers here, the $2.5 billion requires a second fab here. And if I heard you correctly, the second fab is going to be 2 to 3x the first fab. It seems like your -- you'd have the ability to do a lot more than $2.5 billion with both those fabs plus any licensing here. So wondering if you could rationalize the disconnect here, please?

So with the second site and the second fab, there's going to be a series of steps. This is not all going to be built out on day 1. ,[indiscernible] to say, we don't want to create unnecessary or premature depreciation. We're going to have a couple of steps to begin with, we're looking to essentially double capacity. But we are selecting sites that have the requisite expansion flexibility so that without having to go to a third site, we can further increase capacity.

Okay. That is helpful. And my follow-on question is on product gross margins. I'm assuming all the royalty revenue is 100% here. And if I back that out, calculated product gross margin is actually down a couple of hundred basis points from the last couple of quarters here. I wonder if you could help us understand the dynamics there and whether that's that trend to reverse itself here in the near future.

I think Jim commented expectations of increasing margins?

Yes.

And so we -- there will be a lift in the [ GM ] product you going forward, Richard, as we get utilization to go higher and absorption to go higher.

I will say that there was sort of a maybe onetime, but an important event here in the second quarter relative to moving equipment around in the first fab to make space for the equipment that's coming in. So that was incremental expense and cost of sales in the period that did not get capitalized and cannot be capitalized. So that did weigh on product gross margins as well.

So you can imagine what had to happen in the factory to make the space really optimized for the new equipment coming in. It wasn't cheap to do that.

And the next question will come from Neil Gore, Stockholder.

Your goal of $2.5 billion within that goal, will royalties be at 50% of revenue at that time?

I don't think we're in a position to make a specific position with respect to the mix.

I think there's a lot to happen on the IP front. In Vicor is enabling technology on all of the areas where the industry is needs for increased current density and increased power bands. So this will play itself out over a number of years. And the outcome of this campaign is still to undergo the steps we're going to need to take and the effect of those steps.

So I think all I can say is that we see a significant expansion in licensing income in years to come. We do expect crossing of the cars within the industry by hyperscalers, [ bus ] OEMs, recognizing that playing a game of catch me if you can will result in significant issues in terms of the supply chain.

If they're using our technology, the only ethical legal thing to do is to pay for it by way of a license. And then before too long, may apply to the industrials hole.

And our next question is going to come from Quinn Bolton with Needham & Company.

Patrizio, I wanted to come to the licensing side of the business. I think the second license with your first licensee as well as your most recent license looks like those were I think, just a couple of years in duration, which probably means you need to resign licenses as you get close to the end of 2027.

Can you just -- from a big picture level, talk about your strategy with sort of new licenses, would you look to expand to include more of the vertical power delivery content or sourcing agreements, but any -- can you provide any high-level thoughts on re-signing those licenses as the current licenses come due?

Yes. So we have a well-defined mature licensing practice. It's got flexibility where needed, it is not though up for grabs in terms of flexibilities that don't make sense. So it does involve any OEM, any hyperscaler, it does not involve competitors.

The competitors can participate in terms of -- without infringing our IP by sourcing their products, otherwise infringing products into OEMs service [indiscernible] have a license from Vicor.

The licensing model is involved already two kinds of licenses. One, you might call a proportional license, which provides for royalties, unit royalties in the proportion to actual usage. We also, in more recent years, have done 2-year deals that are, in effect, all inclusive.

With these deals, we understand, given the limited time frame what the current usage by the licensee is going to be. But needs to say, given the rate of expansion with hyperscales OEMs in [ VA ] market, in particular, it would be very difficult, if not impossible, to predict their level of business 5, 10 years down the road.

So with all inclusive licenses by necessity, we have to have a short time frame and then negotiate a new license depending on how the business by the licensee evolves during the 2-year period.

And the next question comes from John Dillon with DNB Capital.

Phil, I just wanted to check with you, how are the bookings looking for this quarter?

Last time I mentioned, I think it mentioned in -- the press release, John, the bookings are great. I mean our bookings tend to be -- can be lumpy. So sometimes, we've reported book to bills of close to 2%. This one was a little bit lower, but I don't see any weakness at all going forward. Aerospace and defense is strong. Industrial is very strong. high-performance compute is strong. So yes, all things look good.

Excellent. And in the last press release, you talked about an OEM and you said they had a capability of being a second source. My question is, will there be a second source? And if not, how is a second source coming along for you guys?

So as commented at the shareholders' meeting, our strategy in the short term has evolved with a focus on bringing on additional capacity through a second facility, a second chip fab that we can solidly control.

We've had discussions with respect to potential alternate sources there will likely be more discussions, but the natural disengagements but the terms of predictability time line is such that it would not put us in the position we need to be in terms of expanding capacity for key customers in the next couple of years.

So a shift with respect to the relative focus not a change with respect to long-term strategy. I expect there's going to be out and sources, not just in support of applications in AI potentially in other markets. And that's consistent with, in fact, making the most out of a very comprehensive portfolio that spans across a number of key powers technologies.

Excellent. And do you still expect 25% to 30% of your business from [indiscernible] next year?

I'm not going to make specific comments with respect to customers for obvious reasons, but we enjoy a very strong relationship. And I think these and other customers are doing very well in their own space.

And the next question comes from Richard Shannon with Craig-Hallum Capital.

My follow-up again here. At the risk of ask a very similar question to the last one here. Instead of asking about [ Cerebros ] going forward here, can you tell us what is [ Cerebros' ] the 10% customer in the second quarter?

We liberty to say...

I think we will disclose that in the queue, but I don't know that it would have been Richard. So I don't know that I can comment right now, but let's take a look at the queue.

Okay. I'll look forward to reading that. My follow-on question here is looking at the next customers for a second gen VPD here. I'd love to get a sense of how you expect the sales cycle to go?

And Patrizio, also, if you could comment on the degree to which any changes in architectures in whatever way that you would deem important to convey to us here, how those will affect kind of that sales cycle here, just kind of generally speaking, please?

Let me take the second part first, and then Phil will address the first part of your question.

So as suggested earlier, we see the industry with its usual trades of looking at each other shoulder and parting each other's initiative. To keep going down a path this characterized by continued toll dependency on voltage engine at the point-of-load. This fundamentally flow strategy. It's not going to work.

As suggested in the earlier comments, it's a strategy where you can only get some increment of current density, well below what's going to be needed before too long, at expense of giving up on current gain.

And that doesn't solve the problem. A problem which requires a combination of high enough on density with overall high enough current gain.

Now if you don't have the car gain, as suggested earlier, and that's been the catalyst for being approached by a couple of companies. You can use [ IVR ] to stress somewhat the cards capability, but still short or what's going to be needed.

At the [indiscernible] requiring a still very high current bus converter at 1.8 volt. So that's a strategy that's got trade-offs, as suggested earlier, it's got some good redeeming features, flexibility in terms of petitioning domains. It's great of that, but not far from ideal in terms of overall power system figures on it.

So we see a different approach in the -- is reflected in the power system technology that we developed patented. It's reflected in a chip in converter housing package, packaging technology, the cool be made in ship fabs that are heavily protected by Vicor IP investor strategy we're pursuing.

So Richard, this is Phil. So with regards to the cycle, the development cycle, if you like, if you go back just a few months to the [ APAC ] Conference in San Antonio, Texas. You had a number of big OEMs on a few hyperscale is almost sort of lobbying the semiconductor audience on their AI product development in terms of saying, "here's what we need from you guys with regards to current density", which they were asking for something around 3 amps per millimeter squared. And packaged heights in terms of thermal management and just assembly and yield, issues of less than 3 millimeters.

Now you look at what's being developed and delivered to these OEMs and hyperscalers today is Generation 1 VPD that comes nowhere near that request. And so you can imagine the excitement that's out there to engage with Vicor that has 3 amps per millimeter squared now moving to 5 amps per millimeter squared next year, early next year and a 1.5-millimeter package with very easy thermal management techniques.

So there's a lot of companies that want to engage because they're sort of making do with the current Gen 1 VPD solution. So what we expect is engagement with a hyperscaler and a couple of OEMs now this -- rest of this year. And I believe that those programs will start to, if you like, evolve into production systems, sort of, I would say, late third quarter, fourth quarter of next year in terms of the ramps that are needed.

Which then, as Patrizio mentioned, allows us to move into our first fab. And then as we bring on the second fab in late '27, '28, you've now got the ramp that, that follows through into that new facility with this expanded capacity. So that's what we expect to see.

And our next question comes from Don McKenna with DB McKenna.

Congratulations. And my question deals with the backlog. And I was wondering how much of the significant increase there is attributed to the new licensing agreement, if any?

Relatively little. So we have a feel, pointed out coming from a number of different end markets. So take as an example, the [ VAD ] market. Our level business with key customers there is a large multiple of what it has been in past years. And that's the result of the build-out with respect to AI. So that's just one example of growing demand coming from a multiple markets, which we need to address.

Yes, just to comment on the automatic test equipment market. That's a great story because it's also a factorized power architecture that relies on low noise performance and thin package technology.

We've had a number of competitors come up to us in different shows saying, we just can't get Vicor out of there because of the signal low performance low signal-to-noise ratios that we are able to deliver and also the thinness of the packages. We can't get anywhere near that.

So it's a great market for us, and we are firmly entrenched in some of the biggest [ ATE ] companies, and that market is also growing with new entrants in overseas markets that we're also designing in our [ FPA ] solutions into. So that's going to continue to be a good growth story for us going forward.

Great. So let me -- I think what I'm hearing you say is it's existing customers with increased needs and as for the bulk of this is coming from. But is -- do you also see any of it being just the fact that as you're nearing capacity, people are putting in their orders for farther out deliveries?

Yes. Lead times have cashed out a little bit, but they're generally speaking, consistent with industry. Fence nowadays, whether it's semiconductors, PC boards, some of the key components within the industry have and lead times had to reflect the realities of demand exceeding capacity in a number of key areas, not just ours.

[Operator Instructions] The next question comes from Joe Dabanny with Individual Investor.

I was just wondering if you could speak a little bit about how the next-generation advanced packaging architectures are going to help proliferate Gen 2 VPD across the industry?

It's just got by far the biggest current density, the lowest thermal assistance, the lowest noise, if Phil pointed out earlier, that in [ VAT ] arena, we've had long-standing -- when I say long standing, I mean, 40 years track record of does because of the unique signal integrity capabilities of our products.

Those are also differentiators, believe it or not, in AI, in computing capabilities that more and more are relying on nodes with fondly [ thography ] operating at lower and lower voltages, where signal integrative comes more and more of activity of differentiators.

So we are unique in these capabilities. And again, that uniqueness is not limited to one facet of the overall challenge. It involves many different facets, all of which are heavily protected in terms of the IP we've been developing over the last 10 years. So we feel very good about our opportunities going forward for all those reasons.

Great. And then one more about the recent licensee that signed in May. Can you kind of speak on what would have happened to the supply chain if that license was not negotiated by them?

Well, so we have a well top-out strategy with respect to protecting international property enforcing IP. As you know, in the U.S., a patent holder has a moralistic right to the IP that is protected by patents. And they're right is right to exclude, among other things, importation of infringing products.

And infringing products are now limited to power modules copied by [indiscernible] competitors, it does involve the competitors' customers and contract manufacturers. And those customers, customers, OEMs, hyperscalers. It's incumbent on them to make sure in the supply chain that intellectual property is respected. The inventors deserve to have their IP respected in the marketplace. And we've been very focused on a very comprehensive strategy to make sure that our IP gets the respect it deserves. And I think we have made sizes in that direction. There's more sites coming. And as I mentioned earlier, I believe there's going to be a crossing of the cars in the industry, taking place in the next couple of years.

This does conclude today's question-and-answer session. and this will also conclude today's conference call. Thank you so much for your participation, and you may now disconnect.

Good morning. The Board of Directors of Vicor Corporation welcomes you to the 2026 Annual Meeting of Stockholders. I'm Jim Schmidt, Chief Financial Officer, Secretary and Treasurer of Vicor. I also am a member of the Board of Directors of the corporation. As provided for under Article 1, Section 8 of the corporation's bylaws, I will serve as Chairman of this meeting as well as recording Secretary.

Invitations to attend today's meeting were extended to stockholders of record as of April 24, 2026, and certain guests. Each attendee should have registered in the lobby of Goodwin Proctor on the 17th floor of the building and received an agenda and our rules of conduct for today's meeting.

As you may have seen upon entering the conference room, we have copies of our 2025 annual report on Form 10-K and our annual proxy statement available for attendees. On the screen is a comprehensive safe harbor statement comparable to the language we include in our other public statements regarding the company's financial or operational performance, such as our filings, press releases and our quarterly earnings call. I will not recite the full text, but I remind you, various remarks we may make today may constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Consistent with NASDAQ Listing Rule 56-20, stockholders are afforded the opportunity to discuss company affairs with management at this meeting. However, as shown on the screen, Vicor is in its quiet period for the second quarter of 2026. And as such, we will not comment on specific elements of financial or operational performance for the second quarter or any forward period. Second quarter performance will be addressed during our upcoming earnings call.

On the screen is the agenda for today's event. As shown, we'll conduct a formal business meeting reviewing the proposals before stockholders as well as any business to be brought before the business meeting. As of now, I am unaware of any such additional business. After we take care of formal business, Phil Davies will present a brief strategy review. After that, Patrizio will take your questions regarding the company's business and products. Again, he cannot answer questions regarding our financial or operational performance for the second quarter of 2026 or for the full year.

As has been the case in the past, we'll be posting a recording of today's meeting on the Investor Relations page of our website. I'll now introduce my 10 fellow members of the corporation's Board of Directors. Going forward, our independent directors are, in alphabetical order, Jason Carlson, former CEO of Congatec AG, headquartered in Deggendorf, Germany from 2015 to 2021. Congatec is a leader in the industrial embedded computing field. He is the former President of Semtech Corporation, a leader in analog and mixed-signal semiconductors as well as holding other positions of leadership in the electronics industry. Jason chairs both our Audit Committee and Compensation Committee.

Estia Eichten is an original investor in the company and has been since 1989, a senior scientist at Fermi National Accelerator Laboratory in Batavia, Illinois, outside of Chicago, which he joined in 1981, the same year he joined our Board.

Zmira Lavie has been a partner of M&T Semiconductor, a consulting firm serving professionals and organizations throughout the semiconductor ecosystem since January 2020. Previously, Ms. Lavie was with Tower Semiconductor, a manufacturer of integrated circuits using specialty process technologies from 1988 to 2019. Zmira has over 30 years of experience within the semiconductor industry, including leading diverse business initiatives, R&D, complex projects and process development.

John Shen has been a Professor and Director at the School of Mechatronic Systems Engineering at Simon Fraser University in British Columbia, Canada since January 2022. Previously, John had been the Grainger Endowed Chair, Professor of the Illinois Institute of Technology from January 2013 to December 2021. John has 34 years of academic, industrial and entrepreneurial experience in power electronics, power semiconductor devices, renewable energy systems, microgrids, transportation electrification, sensors and actuators.

Based on the assumed results of the stockholder vote to occur at this meeting, our employee directors will be for the forward term in alphabetical order, Phil Davies, who has served as our Corporate Vice President, Global Sales and Marketing since February 2011. He was appointed to the Board in 2019.

Mike McNamara, who has served as our Corporate Vice President, General Manager, Operations since 2015. He also was appointed to the Board in 2019.

Claudio Tuozzolo, who has been with Vicor since 2001, serves in a leadership role spanning R&D and sales and marketing. Claudio has been a Director since 2007.

Patrizio Vinciarelli, Chairman of the Board, President and CEO, who founded the company in 1981. And myself, I joined Vicor in June of 2021 as Chief Financial Officer, Secretary and Treasurer, and was appointed as a director at a meeting of the Board of Directors immediately following the 2021 Annual Meeting.

Sam Anderson, CEO of IceMOS Technology Limited, a supplier of high-quality thick film bonded silicon on insulator wafers based in Belfast, Northern Ireland. Sam is the former CEO of Great Wall Semiconductor, an important component supplier to Vicor in which Vicor held an investment in nonvoting convertible preferred stock. Great Wall was acquired in September 2015 by Intersil Corporation.

Andrew D'Amico has been in the role of General Counsel for Intellectual Property matters for Vicor since 2006. Prior to his engagement with Vicor, Andrew had 18 years of private practice experience in the field of patent law. Including patent litigation, patent licensing and patent prosecution as well as counseling and diverse technological areas while with Fish & Richardson P.C.

We're joined today by our outside counsel, [ Etor Santucci ], who is a partner at Goodwin Proctor and Co-Chair of their debt capital markets. I also thank Goodwin Proctor for providing the venue and support for today's event. Also in attendance is [ Dean Giesler], our audit partner from KPMG LLP, our independent registered public accounting firm. Finally, I recognize [ Dan Glennon ], representing Computershare Trust Company, the corporation's transfer agent, who has been appointed to act as inspector of election, also known as the teller for the formal business portion of the meeting. Thanks to everyone for attending.

Turning to the formal portion of the agenda. I call the 2026 Annual Meeting of Stockholders to order. On the screen is the agenda for the official business portion of today's meeting. Notice of the meeting was sent to all stockholders as recorded as of the close of business on April 24, 2026, the record date. Only stockholders of record on that date are entitled to vote at this meeting, either by proxy or in-person ballot.

Similarly, only stockholders of record are entitled to present proposals during the business portion of this meeting. The affidavit of mailing the notice of meeting has been delivered by the teller to me and will be filed with the minutes and records of today's meeting. The proxy statement was filed with the SEC on April 30, 2026 and mailed to stockholders shortly thereafter and sets forth the proposals for stockholder vote here today.

The Board recommends stockholders vote in favor of Proposal 1 and Proposal 2. While Rule 14a-8 under the Exchange Act provides for the inclusion in our proxy statement of appropriately submitted proposals from eligible stockholders, I, in my capacity as Secretary, confirm we did not receive any such proposals to be included in our proxy statement.

This slide sets forth the number of shares of common stock and shares of Class B stock outstanding as of the prior 2 year-ends and the record date. As shown as of the record date, April 24, 2026, our outstanding shares consisted of 33,874,233 shares of common stock and 11,717,718 shares of Class B stock. I remind you our outstanding Class B shares possess 10 votes per share, although they are exchangeable only on a one-for-one basis for shares of common stock. As shown, holders of our Class B shares, of which there are 9 possess as of the record date, 77.6% of the cumulative voting power of the 151,051,413 votes eligible as of the record date.

Also as of the record date, Dr. Vinciarelli beneficially owned 26.7% of common stock shares outstanding and 94.1% of Class B shares outstanding, representing 79% of total voting power, giving him control over all governance matters. On a fully converted basis, Dr. Vinciarelli's holdings represented 44.7% of share ownership. Because of Dr. Vinciarelli's voting control under the corporate governance requirements of NASDAQ Rule 5600, we are considered a controlled company, which is defined as a listed entity for which more than 50% of the voting power is held by an individual or an identified group. As such, we rely on certain exemptions under Rule 5600 and do not have a Board consisting of a majority of independent directors nor is our nominating process the sole responsibility of independent directors.

We do not utilize the available exemption from independent director oversight of executive compensation, but instead, maintain a compensation committee comprised solely of independent directors. Of course, there is no exemption for maintaining an audit committee comprised solely of independent directors, which we do. Directors Carlson, Eichten and Shen will be the sole members of our Board's Compensation and Audit Committees for the 2026 term.

Returning to procedure. Our first order of business shall be to determine whether the shares represented at the meeting, either in person or by proxy, are sufficient to constitute a quorum for the purpose of transacting business. I introduced [ Dan Glennon ] of Computershare earlier, who has been appointed to serve as inspector of election, having pledged to perform those duties under Delaware law to support me in the conduct of this meeting. His pledge will be filed with the minutes and records of this meeting.

Are there stockholders in attendance who have not submitted a proxy but wish to vote in person? If so, please raise your hand so that Dan may confirm your eligibility as of the record date and give a ballot to you. Stockholders present should be aware for purposes of preparing the slides used today, we have assumed those who have signed and submitted a proxy, even though present, intend to vote by that proxy. However, are there any stockholders who previously submitted a proxy who would like to change their vote on the matter before stockholders? If so, identify yourself to Dan.

Seeing none, I now ask the teller to inform us whether a quorum is present.

Mr. Chairman, I can report as of the record date, April 24, 2026, 33,874,233 shares of common stock and 11,717,718 shares of Class B stock were outstanding, representing an eligible total of 151,051,413 possible votes as shown on your slide. Given our receipt of Dr. Vinciarelli's proxy representing 79% of eligible votes, far more than the simple majority of eligible votes required for a quorum are represented here today.

As you have just seen, I have received no new ballots nor any instructions to withdraw or change an existing proxy, so the numbers previously reported and shown on your slide are accurate. As of the record date, Vicor had 67 holders of common stock defined as held of record under Rule 12g5-1 of the Securities Exchange Act of 1934, representing the sum of stockholders identified by Computershare as distinct holders in possession of their shares or stockholders whose shares are held by custodian for a single account. A complete list of stockholders as of record date compiled and certified by Computershare is open for examination at this meeting by any stockholder.

Thank you. I therefore declare a quorum. The polls are now open and will remain open until the matters before the meeting have been presented and the teller confirms no votes have been cast other than those received by proxy.

We will now proceed with the discussion and voting on the proposals set forth in the proxy statement. Since the proposals were addressed in detail in the proxy statement and since 91.5% of shares eligible to vote are represented by proxy at this meeting, we will dispense with a formal motion and balloting for the 2 proposals. Further, as mentioned, Dr. Vinciarelli's proxy, representing 79% of eligible votes, has been received and voted in favor of the 2 proposals. Therefore, each proposal received prior to today's meeting has more than enough votes for approval.

Each stockholder was entitled to vote for a maximum of 11 nominees. Cumulative voting was not permitted. Is there any discussion regarding the size of the Board and the election of the nominees?

The second proposal before stockholders is associated with the SEC's rules implementing the say-on-pay provisions of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011, which required public companies to allow stockholder votes on the compensation of named executive officers referred to as NEOs. The second proposal represents the advisory vote on stockholder approval of our NEO's compensation as disclosed in the Compensation Discussion and analysis section of our proxy statement, consistent with the disclosure standards of Item 402 of [ Reg S-K ].

Because this vote is advisory, its outcome will not be binding upon the Compensation Committee or the corporation. However, the Compensation Committee does consider these votes when making future decisions regarding executive compensation. Is there any discussion of the say-on-pay proposal?

There being no further discussion regarding the proposals, I ask now whether there are any other matters to be properly brought by an eligible stockholder before the meeting.

Hearing none, I ask once more if there is a stockholder who has not cast a ballot and now wishes to do so or is there a stockholder who has not yet had his or her ballot collected.

There appears to be none. I now formally close the polls. Based on the vote totals previously provided by Computershare and seeing no additional votes reported by the teller, the slide shown sets forth the following results.

All 11 directors standing for reelection received an affirmative vote of at least 94.5% of the total amount of votes cast, representing at least 86.4% of shares entitled to vote. Therefore, all 11 nominees are hereby reelected. The table shown on the screen shows the reported results of the other proposal, of which passed with a 99.8% approval. The final results of today's ballot will be reported in detail on or before Thursday, June 25, via filing of a Form 8-K with the SEC.

There being no other business to come before the meeting, I will entertain a motion to adjourn.

I so move.

So thank you. All in favor of adjournment, please say aye.

Aye.

All opposed, say no. Vote is in favor of adjournment. This concludes the formal portion of our meeting. At this time, Phil Davies will present a strategy review. Phil?

Thank you, Jim. Good morning. It's great to see some familiar faces and some new ones. Great. Okay. So I think it's clear that Vicor is in a much stronger position than we were a year ago. And our new corporate strategy that I presented at the ASM, the last couple of years, actually, that was developed and set in motion 3 years ago is the reason for that strength.

So my goal today is to bring you up to speed on each of these corporate strategies. But before we get into that, I'd like to begin by showing you a new set of objectives that we have put in place, 3 very positive changes from the objectives we set 3 years ago. So we are increasing our target revenue from $1 billion to $2.5 billion, gross margins from 65% to 70% and operating income of 40%, up from 35%. So these new objectives are as a result of the progress that we've already made and the growing market opportunities that we see for our power module sales across our target markets with our top 100 customers and our IP licensing practice.

As a refresher for those of you who attended last year, the selection of our top 100 customers across the 4 market segments was made based upon the criteria shown here. Strategy always comes before structure. So following the top 100 selection, we organized our front-end sales and field application engineering teams around the top 100 customers. This has brought a very high level of focus, not only to our front-end teams, but also across our corporation. I cannot emphasize really how much of a difference this has made to the execution of our strategy.

So the synergy between our IP licensing practice and our power module business is shown here. So our focus at this point in time is the high-performance computer market with AI processor OEMs and hyperscalers as the need for high-performance power conversion technology that Vicor developed has risen dramatically, along with their need for multi-sourcing in their supply chains.

So the model is quite simple. An OEM or hyperscaler can take a license from Vicor for a specific intellectual property or all of the intellectual property. They are then free to source infringing products and technologies with the high performance they need from any supplier they choose. The royalty they pay Vicor is based on the amount of IP that they are licensing and discounted by the amount of power module purchases they make from Vicor. As you can see, very, very synergistic.

Our IP licensing business is growing, and we have high expectations for its contribution to our growth and profitability due to the critical need for advanced power conversion technologies, again, that Vicor pioneered. So as we expand our licensing business, we're also very focused on continuing to bring advanced power conversion products to market, anticipating the needs of our top 100 customers and their power delivery networks. The products are on display around the meeting room here this morning, so you can take a look at those. And again, they are 3 to 10x the power density of our nearest competitor, quite incredible. And the reaction from our top 100 customers, of course, goes along with that, very excited.

So let's take a look now at some of our markets. We're going to start with industrial. So our strategy for the industrial business, which has literally thousands of customers globally, has been to narrow the focus for Vicor and our channel partners. It's very easy to boil the ocean in this type of market, so many small customers making up industrial. But 3 years ago, as part of our new OGSM, we put in place a new leadership team and a whole team around that to focus on the top 100 in industrial, but also selecting what we call top channel accounts, working very, very closely with our distribution partners, which have also been narrowed down, as you can see here, to a set of 5 or 6 companies.

When I joined Vicor in 2011, we had 48 distributors globally. So a big change over the years. So the top 100 drive the product strategy and working closely with the distribution partners, as I've said, we've developed relationships all the way up to the CEOs of our distribution partners. So we get a lot of attention to the Vicor product and technologies. We've identified over 500 top channel accounts globally. They have very similar applications to our top 100, so they can use all the similar products we bring to market. The power delivery networks are very similar. And so again, a synergistic strategy in our top 100 and in our channel business.

So the results are starting to show, as you can see here. It takes a while to get the design-in, design win process going. There's a gestation period in every market. But as you can see here, things are really starting to pay off. Dramatic growth in pipeline of both design-ins and design wins. And 2026 has actually started off at a much higher rate than 2025 achieved. So really good stuff.

Are there any numbers of those?

Yes, there are, but I can't show them to you. I apologize.

Can you tell me later in private.

No. But let's just say they're tens of millions, okay? So a major market that's driving significant growth is the automated test equipment market. As the AI market explodes, the testing of the silicon in that market is also exploding. And we have a really great market share position with some of the leaders in that market. So we have a very, very focused effort on the ATE market.

New factorized power module solution, you can see a couple of the chips there in the picture being launched right now, and our lead customer has placed large early orders for this chipset. And going into the fourth quarter, we'll be launching that chipset out to all the other ATE companies that can also use the same type of products, okay?

So in summary, our industrial business, which I talked about doubling, is well on track to do that by the end of 2027. We have high confidence that we can achieve that doubling that I talked about. So we're firmly on track there.

Let's jump into aerospace and defense. This has turned into a growth business for Vicor. Typically, 2% to 3% is normal for most companies in aerospace and defense, but we're growing much higher than that. Again, focusing on the top 100 customers across the globe, companies that can work with the United States of America. We've launched new families of DC/DC converters and AC to DC converters. I spoke of these at last year's ASM and the opportunity pipeline for these products that's developing at our top 100 accounts is very impressive. And that's based upon the performance of these products, but it's also based upon Vicor being seen as a very strategic supplier to these corporations and a 40-year heritage in this market. We have a very commanding position, particularly in North America and a growing one in Europe.

The power density of our products across these application segments, which are the targets for us, 5 to 10x the nearest competitor. And these companies -- jump forward there. These companies that participate in these market segments really demand power density and low weight, okay? And our products deliver on that way above the nearest competition. So this was a product I showed last year, a new rack-based product for the open consortium that's formed in the military market. This is going extremely well.

One of the reasons is that the building of this rack-based system uses Vicor power modules. And our power modules have such a high power density that the power that we can deliver out of one of these rack-based systems is twice the nearest competitor, okay? So power efficiency, really sort of margin in the system is sort of built in here, okay? So this product is going really, really well. And it was a new effort from one of our subsidiary power companies.

The 270-volt products I showed you last year, again, really going extremely well. We entered a new market, AC to DC. We were pretty much established in DC to DC. The AC to DC market offers us a new $850 million SAM to target. And again, the beauty of this, they're the same customers that buy our DC to DC converter products. They love Vicor. We're strategic. So this is also getting a really great pipeline of development for the future.

So I'll come to that. If you could -- I got a slide on the satellite stuff. But these products are pretty much sort of ground and air-based, airborne-based. So defense systems, offensive systems too and land-based systems. So really much -- very much land-based at this point in time or air-based within the atmosphere.

Okay. So I jump ahead there. Here we go, satellites. Okay. Good timing. Okay. So we -- I talked about this last year. Boeing is our lead customer. And our focus in this market is really going to be the LEO and MEO satellite applications. We're not chasing the high-volume, low-cost Starlink type satellite market. That market uses automotive-grade products, and it's all about cost. We're focused on LEO and MEO, where performance matters, okay? And we have a new 28-volt chipset coming on to the market. There's lots of opportunity for 28 volts.

But with the demand for more AI in space, more intelligence in space, the 100-volt is actually getting a resurgence because FPGAs and ASICs need more power and 100-volt power delivery network is better than a 28-volt one, okay? So that's happening there. So more to come on this as we move through '27, but this is going to be a growth market for Vicor.

Okay. So let's move on to the market that gets lots more questions than anything else, the AI business. This is obviously the highest growth business for Vicor. And that's both on the power module front and also our AI licensing practice as it stands today. So gigawatt AI data centers are going to be built with megawatt racks and will use what are now being called super chips. You see some examples here. So you have the Cerebras wafer scale technologies. You have the EMIB technologies from Intel and the CoWoS technologies from TSMC. These chips will be somewhere from 40 to 60 kilowatts in power, okay? The only way to power them is with vertical power delivery, okay?

So the innovation and technology in this market is just mind blowing. And -- if you look at the very important criteria of the data centers that will be using these chips, it's really all about compute density and compute density is relative to how much power you lose in that data center powering these products, okay? If you can do it efficiently, you can put more racks in a data center and get more ROI, okay? So that's the financial metric that I think CEOs of both chip OEMs and hyperscalers are going to start to look at because compute density in data center is going to be very, very important.

So Vicor has had a decade of experience and innovation on so many levels in high-performance VPD. As our Generation 1 VPD ramps into production, our second-generation VPD with currently 3x the current density and in the near future, 5x the current density will create a major step-up in performance for Cerebras. And that will enable them to build an even more competitive system that is today leading the market in terms of inference performance.

So why did Cerebras choose Vicor back in 2017? Why did they do that? It's for 2 reasons. We had 2 critical performance metrics that enable high-performance VPD with no trade-offs. I'll talk about those in just a moment. But OEMs and hyperscalers that are now developing their own superchips to compete with Cerebras using CoWoS and EMIB are making bad decisions. They're running in the wrong direction. And that's going in that direction because they're looking at commoditized multisource supply chain needs. But sacrifices are being made in AI performance, data center compute density and ROI because of those choices.

Here's why. The new 800-volt to 6-volt architecture that's now being talked about across the industry and is being promoted by every single GaN company on the planet is a result of bad power architecture choice being made by NVIDIA and the open compute consortium. 800-volt has its merits. In a gigawatt data center, maybe even in a megawatt rack, but 6 volts or even 12 volts as the intermediate bus voltage to these super chips is running in the wrong direction and into the arms of massive power losses, which will consume precious grid power delivery budgets.

Why are they doing it? It's because the commodity multisource voltage regulator technologies do not have those 2 critical performance specifications, current gain and current density. By lowering the operating voltage, discrete semiconductor companies can increase their current density, but at the cost of current gain. IVR companies have good current density, but really bad current gain. And this is a slide I love putting together. As you can see here, that's a real slide. I didn't make a mistake. That's the blue dot, our current multiplier technology up and to the right. You can see where VRs and IVRs sit with their current density and current gain. The current multiplier technology, current gain and current density is off the charts, literally when compared to our competition. That's why Cerebras chose us. And I believe as we launch Gen 5, that's going to be the same reason why other strategic companies that we will work with will choose Vicor.

I put this into a side-by-side comparison just to give you a little bit of an example. I don't want to get into the engineering details here. But you can see on the left with the 6-volt power delivery, you've got 6.7 kilo amps going across the intermediate bus to that 40-kilowatt chip. With the 48 volts, you're at the 800-plus amp range. Now there's a beautiful law in the electrical engineering industry called OMS Law. And that's the square of the current times the resistance is the power loss. The square of the current. You have to multiply 6.7 kilowatts by itself, and that drives up that power loss significantly. With a 48-volt delivery power system with the current gain and the current density, you save kilowatts on the boards, tens of kilowatts in the rack and megawatts at the data center by just going 48 volts with a high current gain, high current density solution, okay?

Pretty straightforward. And that's billions of dollars in lost revenue if you're a data center operator. So the time line for our lead customer is shown here. For reasons related to system-level signal integrity challenges requiring the development of a new isolated current multiplier, we're about 9 months later than what we showed you at the ASM last year. But that's not a bad thing in and of itself because CS3 using our Gen 1 has the performance to dominate the market on inference. Cerebras is becoming extremely successful. And going through this change, we've developed new innovative technologies and higher performance along the way.

So here's the updated time line for our rollout to strategic customers. This is a photograph of our development board that will be provided to our strategic customers in Q3, along with a suite of development tools, software, modeling systems, things like that, being followed in Q1 of 2027 by a step-up of 47% in current density to a new level of 5 amps per millimeter square. And I believe that will still be in time for our lead customer preproduction and early production, which will probably start towards the end of 4Q '27.

So in closing, our business priorities for the next 12 to 18 months are shown here. As a company, we are very focused on the successful execution of these various pieces of our business. They all leverage our new vertically integrated chip fab in [ Andover ] and will drive our growth requiring the construction of our second fab. And the journey towards our new financial targets of $2.5 billion in revenues, 70% gross margins and 40% operating income. Thank you.

At this time, Patrizio will take your questions. Once again, I remind everyone, we are in our Q2 quiet period. And accordingly, Patrizio will not be commenting on current operational or financial performance. I also remind you as Chairman of the meeting, I will be following rules of conduct distributed to attendees. So please limit yourselves to one question with a permitted follow-up.

With that, I'll now turn the mic over to Patrizio. And also, I'd like to mention when you have a question, please go to a microphone because we're recording this, and we're going to post it afterward.

Can you hear me? How about without a microphone.

Sounds good. Pick it up -- there is some air condition there. Doesn't agree with me. So I want to correct one thing that Phil said, he referred to the competition in the A market as commodity. That's the aspiration. But the reality when it comes to vertical power delivery, our first-generation VPD is that implemented with competitive type of building blocks, it's actually extremely expensive. It's multisource for the purpose of being commoditized because it's not commoditized because of mechanical thermal management and other complexities that actually make it very vulnerable to our advanced solution, not just in terms of performance, but importantly, in terms of cost.

So we're up against commodity alternatives, which are actually very expensive. They're expensive not just in terms of their price tag because of the complexity to make these things. But as a result of the complexity and the complexity associated with building a system, leading to significant yield loss, lack of reliability, they're very costly to, in particular, one very large hyperscaler that has been, in effect, driving adoption of these kinds of solutions. So we're going to have not only we have the higher density, higher kind of capture, which is very important in terms of ballpark capability, but also the lowest cost.

You all hear me. No problem.

I'm not shy. I'll be first. So Patrizio, I'm wondering what is your #1 priority for Vicor in the coming year?

I'm sorry.

What's the #1 priority for Vicor?

So our #1 priority, I would say, from the product development perspective is to satisfy the needs of a new customer and then scale up that success story into other customers, other applications in the AI market. And I can say at this point with respect to the best development, we are done. We actually coincidentally had a meeting yesterday with a new customer where we presented the results of the configuration develop for them.

As Phil pointed out earlier, that system is quite complex. It had at the system level, some grounding problems, which we have to solve in order to overcome signal integrity issue, which we have solved by adding isolation to our multiproduct. We completed that development successfully. We have very clean performance and we're on track to begin scaling up the next-generation system.

So development for Gen 2 VPD is done. Now you're going to productize it. Is that where we are?

So I'll answer the question in terms of where my focus is, as received from the oral trust of our efforts. So I stop worrying about that generation and probably focus on next. And that's not because of deficit but because of the need to be focused on that which will drive the next generation of growth. So we were actually discussing yesterday with Claudio accelerating the time scale with respect to stepping up the current density capability from 3 amps to square millimeter. And we may be able to beat the Q1 '27 time line by investing a little early in some tooling. It's very expensive tooling, but given the market opportunity, well worth moving on aggressively. So that's my primary focus right now.

Great. Can you hear me better now?

Yes.

[indiscernible] everything I said.

And how about the second source? How does that fit into your priority schedule?

Yes. So it's a complex set of issues there. We have made actually a bit of progress with one candidate, but on second thoughts, they may not be the best choice. I'm having some conversations at the beginning of July with a larger company. We may further expand the candidate list. We shouldn't feel compelled to make an instant decision. It's an important choice for the medium to long term.

I have several questions on your licensing business. Do you seek people to license your product and do they come to you?

Do they what?

Do they come to you to license? To seek?

They come to us to license. We occasionally provide a gentle reminder. But -- so I'll give you the example of the most recent licensee, which we can't talk about the name, but the license came about a month ago. And the whole negotiation only lasted about 3 or 4 weeks. And they came to us because one of their suppliers got into trouble. They had provided a solution that infringed patents that Vicor successfully asserted in its first ITC case, which now dates back 1.5 years, 2 years, for which we gathered last year an exclusion order.

So even though they were not directly involved at the beginning through some follow-up initiatives that we took involving customs and border patrol, we got their supplier to have to stop making products with the infringing components. And that immediately catalyzed the action because not billions, but tens, if not hundreds of billions worth of revenues suddenly were on the line. So as you can imagine, that led to rapid progress.

And any new licensee probably had I'm infringing on your patent prior to licensing your product. Part of your license agreement, do you drop any potential lawsuit for their infringement?

Well, so every one of these situations is a little different. And as to say, we have to be open with some level of flexibility to deal with different circumstances. But at the same time, we have a well-established licensing practice at this point. So the largest OEM in AI, we've had 2 licenses, the nearest competitor, one license, one large hyperscaler, license. Every situation is a little different. In -- going back to the very early license, the structure of that license, which was driven by a particular type of module, so-called NBM was a proportional royalty model where fundamentally, the licensee paid in direct proportion to the number of units used. And it was somewhat specific to that type of usage.

With the same licensee, the later license was an all-inclusive license with a different kind of royalty system. The license we recently granted is yet somewhat different one. In some cases, there's a bit of a catch-up that needs to take place because infringement may date back months or in some cases here. In other cases, it can be just proactive.

So with the first license, there have been no infringement in the past, it was all forward-looking. And depending on the circumstances, we will approach things in a somewhat different way. We're discussing yesterday the situation of a hyperscaler whose license coming up for renewal and where in the first instance, there was provision within the license to, in effect, deal with past sins as part of the license deal.

The next time around, the sins are committed by the supply chain to that hyperscaler may have to be taken and dealt with apart from the going-forward license that hyperscaler will need. So we are prepared to deal as circumstances warrant, not situations alike. But we have, at this point, and Andy has been very much involved with this, a structure, a methodology for negotiating these deals how many calls did you have over the course of the month of -- I think it was -- you were in Paris at the time. That's where some of the conversation started or it was after you got back.

Yes. It started traveling through [indiscernible] almost daily...

Yes. So I think our innovation model, our IP moat creation process, which Andy is very much part go back now a long time. They are very well structured. And as you might have heard me say from quarterly meetings years ago, we planted the mine field and some of those mines have gone off, and they brought about some deserved compensation for all the investment that we made.

A lot of what goes on in the industry, in some cases, people realize in other cases, they don't. It's built on the back of advances that Vicor did because the nature of the industry is one of following on the tracks of the pioneers that, in effect, scout new lens and solve in novel ways, problems that exist or problems that will come around as a result of the evolution in the industry needs. So case in point, the current multiplier technology. When we developed that technology, the AI didn't exist. And the kind of needs that are now in front of us that stand in the way of further advances in compute capability were not evident. So we were there first. We got the right ideas. We did a good job of protecting those ideas. We have a very comprehensive patent portfolio. We've had 2 IDC cases thus far. The second one is in progress. There's going to be more. And our goal very simply is to get the industry as a whole to, in effect, modify what they call an ecosystem, right, to reflect the presence of intellectual property that needs to be accounted for and paid for.

And on May 12, an analyst came out with something saying that you were selling everything you could produce. Okay. On May '26, which was 2 weeks later, you revised your guidance for the second quarter, increasing that by $14 million. Okay? That $14 million, could you break down a percentage as how much of it was from royalty income?

That's an operational question, Patrizio.

Yes. So I think I can answer it this way. As we stated in the press release, there were 2 contributions to the adjustment in the guidance. One was demand for products and the other one was a new license with its royalties captured within this quarter.

So in the near term, until you can increase production, your increases in revenue will come mostly from royalties?

We're increasing both. We're increasing both -- Mike and his team have been making great strides with respect to bringing about increased operational efficiency, increased yields, increased capacity. if you were to take it to the factory, which you can't. But you would see that there's a lot of moving pieces. We're making room for some new lines and equipment that is going to be installed over the next couple of months and be operational by the end of Q3, beginning of Q4. We're staying ahead of a demand that is rapidly escalating from our lead customer, from other customers, from companies that are at the center of AI and at this periphery because, as Phil mentioned earlier, AI drives a lot of growth indirectly by way of all the infrastructure that needs to be installed to support these very large facilities.

Congratulations on your excellent progress since the last annual meeting. I have 2 questions. The first is with respect to the VPD, second generation. As you develop that, does that also involve changes to the fab and to the machinery in the fab? Do those things come along at the same pace? Or does it require the development of new machinery?

If I understand your question, it has to do with whether second-generation VPD requires a somewhat different set of equipment processes. And the answer is no. So I think one of our fundamental innovations aside from the core topologies and control systems and unique components that enable the very high power density is the manufacturing methodology. So what we pioneered in the power electronics industry is a methodology, which is very analogous to that of a wafer foundry.

As you know, in a foundry, semiconductor wafers are built with common denominator metrics. So at a certain generation, it could be a wafer of a certain size. But within that size wafer with tools, equipment that are earmarked to process wafers of that particular size. You can have depending on the particular chips that are manufactured with that wafer, more less mass steps, process steps. Obviously, the dimensions of the chip can be larger, can be smaller. It could be a GPU of this dimension. So it could be a wafer scale engine such as servers.

But one of the key enablers in the semiconductor industry is the common denominator wafer manufacturing methodology. There's been no counterpart for that in the powerlectronics industry. Every module historic, including bricks getting back 40 years, have been made on sort of an ad hoc basis where with a different power module, you have sort of a different set of process steps, equipment tooling. Whereas with our methodology, and we don't have a panel here, it's not a cylindrical wafers in the semiconductor industry. It's a tanger panel. But we have a standard panel size. And with that standard panel size and the same equipment and a series of process steps, we can involve more or fewer steps depending on the particular type of device.

And we can get out of that combination of process steps, a lot more devices, if they're small or fewer devices if they're large. But it's the same equipment. It's the same process steps. And that gives us a great deal of scalability. And remarkably, actually, with advances in the technology, further advances in the technology, we can get not only a lot more chips per panel, but we can also reduce the complexity of the panel itself in terms of what you might call the number of mass for a chip as in a converter housing package.

So we can use the same infrastructure to build more value. And in fact, talking about the transition from CS3 to CS4 with service, with CS3, one car multiplier has dimensions about 30 millimeter by 70 millimeter and can only supply about 350 amperes. With CS4 initially, devices that we cutacterized yesterday in a fraction of the footprint, only 20 millimeter long by about 8-millimeter wide or 23x 8, we can deliver double the current or nearly double the current 600 amps. And before too long, a matter of 4, 5, 6 months, 800 amps or nearly 3x the current. That enables us with the same infrastructure and the same manufacturing methodology to, in effect, create a lot more value, both in terms of the number of systems that the customer can assemble out of a panel and the revenue level that we can generate out of those assemblies.

Okay. So you don't have issues with process technology. It's really the R&D focused on what goes in the chip itself.

Yes.

All right. Second question is for the VPD first generation, are you currently shipping some of that? I'm curious as to the percentage of, say, 2026 business you see in VPD first generation? Or is that just a transitional product?

Yes. So let me answer in terms of VPD solutions. So this year as a ballpark in terms of percentage of our revenue, it's I would say, around 20%, 15% to 20%. In '27, it will jump to a substantially larger percentage.

With second-gen VPD as we engage with other customers and applications, I think we're going to be filling fabs, not just the existing fab, but the multi year of fabs with these building blocks. The level of demand and the need for these kind of solutions as distinct from the so-called commodity solutions, which are commodity because they cost a lot of money, don't work all that well is huge. I'll turn to the right.

This is [ Shani Mawaly ] from Needham. Congrats on the raised $2.5 billion revenue objective. I know you're not guiding, but any help of how we should think about the timing of this target? Like is this a 3-, 5-, 10-year kind of horizon or target?

Any help with respect to one more time?

On the $2.5 billion financing.

The $2.5 billion. So I think the best way to think about this is with an analogy to what had been our $1 billion target. So needless to say, for a number of years, there was an aspirational number that maybe at times appear to be somewhat out of reach. It's now around the corner. And that's the basis to set the next aspirational target. That's a target that given what is going on, particularly in the AI market, could come about remarkably quickly but it could also take some time, very hard to predict a time, and it would be, I think, unwise for me to speculate.

But I would say the following that I see scenarios where that could happen remarkably quickly. Everything is moving very, very fast in artificial intelligence. And we happen to be from the power system technology perspective, the company that had anticipated some of the critical needs and have a unique way forward, which the competition lacks. So through a combination of our licensing model, partnerships relating to that fabs that could be jointly owned and our own existing fab and a new fab that we're working on bringing about, a $2.5 billion revenue level could come about relatively quickly. But I won't tell you exactly when for various reasons.

Yes. No, fair enough. And I guess as you're making progress towards securing a second facility, can you -- any updates on, I guess, maybe the timing when it could go into preproduction? Is this going to be existing land or existing facility, what equipment may be needed?

Yes. So we've been working at it for the last 5 months. We made a number of offers for both plots of land that could support a campus. We have also made offers for buildings within a 20-mile radius of a first fab. I think it is -- we're about to make another offer on an existing 350,000 square foot facility with an opportunity to build 600,000, 700,000 square feet.

I can't tell you yet exactly when we're going to have a deal done, but to put Mike from a meeting yesterday, we need to move because the ability to stretch capacity measured in number of panels or the ability to stretch capacity more importantly, measured in hundreds of millions of dollars worth of revenues within the walls of the [ Fell City ] facility gets to its limits as we get to the end of this year, beginning of next year. So we changed our focus to leveraging something that exists in terms of the building, possibly on a large enough of land that we can further expand upon.

Got it. And then just one last one on licensing your VPD technology. It sounds like you've been evaluating partners. And I'm just curious to hear what are the characteristics you're looking for, for, I guess, a dual source for your VPD technology?

So the right attributes for a partner involve synergy the ability to trust largely based on having good alignment with respect to interest. So this is, as I mentioned earlier, not an easy choice, but one that I think we're going to be able to make being in the seat with respect to choosing whom we partner with. I think the expansion of capacity by way of an additional facility that is 100% Vicor. That's something we can totally control and that we're moving on. I think the expansion of capacity in partnership with some key customer, that's another opportunity.

In a way, with both of those opportunities, there are fewer issues than with the [ Alten Source ] model. One of the challenges with the [ Alten Source ] model when it comes to overlapping interest is that the potential partners may have agendas of their own that don't lead to perfect alignment.

Congratulations on a good year, [ Bill Dillon ], private investor. A little bit over 2 years ago when you first announced the progress in your vertical power delivery system in a conference call, I think in February, you said we're going to need a second foundry. And believe it or not, there were people in this room who thought you were getting ahead of your skis because you were doing $400 million in sales, you had $1 billion in capacity, and we were still kind of bumping along at $400 million. So 2 years ago at the annual meeting, I asked you what was it going to take for you to go to a second fab to build it, perhaps to have a partner. And you said at that time, we needed to be able to prove that we could mass produce the product at a profitable price point. So can you tell us today that you have 100% confidence?

Yes. 100% confidence both with respect to the demand and the ability to satisfy that demand. So we are absolutely on the right track. As I mentioned earlier, with respect to the enabling technology, the power conversion engines, control systems and all that good stuff. The manufacturing methodology by way of a chip foundry analogous to a semiconductor wafer foundry and the kind of performance attributes that AI, in particular, but industrial, defense applications as well, other markets need where, I would say, perfectly well aligned in terms of market demand in some end markets is literally exploding and our technology capabilities, including the manufacturing methodology to scale that capability.

So recently, you made a projection that you might be at a $200 million run rate in Q4. And I want to -- I guess I can take from what you're saying this morning, you're 100% confident that you can actually manufacture the product, get it out the door without hiccups.

That's Mike, are you 100% confident I'm using this just to make sure that we're all -- so we constantly review -- we're actually having a meeting at the beginning of next week to review expanding capacity, review it against the build plan, the forecast, again, with an eye to make sure that in taking steps with respect to bringing about not just more equipment we're fitting within our existing facility, but a separate facility structure, as I mentioned earlier, with an existing building and some land with longer cycle time, bring about additional buildings that we are staying a few steps ahead of the demand.

We're also going to be, as discussed in quarterly meetings, more and more selective with respect to which customers with applications we actually take. So case in point, we derive significant revenue from making NBMs that uses up capacity. Now MBMs have been knocked off by competitors that at this point, make pretty good NBMs. We have a licensee model. Our licensees can buy NBMs from us or based on the royalties they pay us, buy them from competitors. We may not want to take on more MBM business the customers have not left in the lurch. They get an opportunity to source it from others. We get routing, we can devote that capacity to something that is much more leveraged in terms of those kinds of things that we can only make for customers that are single cell with us and are dependent on being able to keep up with that demand.

So part of this is also selecting the mix of applications that we want to support at a time when capacity is relatively tight.

Justin Clare with ROTH Capital Partners. Just wanted to follow up on the capacity here. So you talked about expanding the first fab about 50% or so from supporting $1 billion to $1.5 billion. I wanted to check in to see if that's still the expectation, what the timing might be in terms of when you could ramp that capacity? And then just looking to the second fab, how much revenue might be supported by a second fab? How -- what's the size that you're contemplating there?

Yes. So with respect to the existing fab, as you point out on the record saying that what was a $1 billion revenue goal for that fab has been expanded to the $1.5 billion level. What I just said in connection with selecting the products that we make in that fab has a lot to do with that. Particularly with second-gen VPD, we have an opportunity to raise the revenue per panel by about 2x. So that obviously moves the needle big time with respect to capacity measure in terms of dollars as opposed to number of panels or capacity measure in terms of number of chips that are smaller, which we can get more per panel than with earlier generation technology.

As to the next increment, that's, again, part of what we're sorting out in terms of what facility, what campus. It may be that the step-up is more than 2x. We don't want to get ahead of ourselves, but then we don't want to get caught flat-footed either. So we're watching all of this. We're not jumping to the gun with respect to making a premature or immature decision, but we also feel the urgency to act.

Right. Okay. And then I just had one on the licensing. So you had just announced another licensee recently here. And that one is much more broad-based. So it's not just the NVM technology is my understanding. And so I wanted to understand, is that an OEM that's going to be producing many more products that cover different patents in your portfolio, including potentially vertical power? And then just curious, was there a onetime kind of catch-up associated with that licensing agreement? And can it support a recurring revenue into the future?

Well, you really figured that out. Don't need me. So to your first point, this OEM has been using NVMs. And as I mentioned earlier, got led into their own placed by its supply chain and got into trouble in terms of its multi-source strategy and took corrective action very promptly. But that process, which only lasted a month, very quickly, I think within a week, got to a realization by the OEM that beyond taking care of just their issue with NVMs, they should be proactively taking care of the next set of issues. So we actually had offered a cheaper license just to NVMs. And the customer wanted to have the whole shooting match because they will be using technology before too long that would be an issue because of other patents. So I don't know if that answers.

Yes. The other part of the question was that can it support a recurring revenue stream going forward?

Yes. No. Actually, the royalty rate this year is half of the royalty rate next year, it doubles. To your point with respect to catch-up because of how -- from accounting principles, we recognize given that there is a set of payments that are determined by the license. We recognize those initial payments, which are for this year, again, at half the rate of next year. And as quarters roll along, we'll start recognizing the royalties for the period of the license where the rate is locked in.

My name is [ Ron Feinstein ]. I'm a long-term investor a couple of decades. I don't have a question. I just have a comment. I've watched your sales and marketing executive role over about 15 years. And his domain knowledge, his articulation of a complex strategy is extraordinary. And it's just wonderful to see that function keeping pace with the rest of the talents of your organization. I congratulate you.

Thank you, Ron. Appreciate it very much.

I'm [indiscernible], individual investor. I wanted to clarify a simple question. Can you confirm how many OEMs and how many hyperscalers not counting Cerebras, you have committed to VPD?

They're all going to use VPD. You can't if we look out 2 years, an AI system without VPD just doesn't work. So let me be more specific with respect to this. NVIDIA has not yet deployed the system with VPD, but they suffered major constraints in terms of power delivery capability and GPU performance because of lack of VPD in a way, Cerebras in terms of its power system solution is much, much more advanced. Now the King of the Hill with a dominant position can for a certain period of time to extent that they can sell anything they can make or they can sell twice as much as they can make, take and do so very logically, the position that we're going to commoditize, we're going to drive multisource, we can do without advanced power system technology in order to accomplish those other goals.

And that works for a while until the competition that needs to catch up with the leader by bringing about better hardware, better solutions gets fine enough down that path to make it -- to make the strategy of keeping it simple and keeping it multisource viable. At some point, it's no longer viable. So whether it's NVIDIA, [ AMD ], any the OEMs and most importantly, the hyperscalers because the hyperscalers, as you know, they are competing with the OEMs, right? Google, as an example, with its CPU is -- that's actually the one hyperscaler that took the lead with respect to first-generation VPD paying the price, not just in terms of very expensive VPD solutions, but also solutions that are not all very reliable, very difficult to assemble. All the other hyperscalers are going to have to go down that path in order to be able to deliver the kind of performance that the Google TPU has, which is quite good. It's enabled by VPD. Without VPD, their system would not be as good as it is.

I have a follow-up. In October of last year, you mentioned you got to a $90 million run rate in licensing, and you had a line of sight to double that in the next couple of years was the phrase you used. Do you think that's accelerated now?

Yes. I think that the $200 million, $300 million contribution from licensing is a conservative number. I think, frankly, that could get a lot higher. Just one hyperscaler, just one might lead to that number because the current consumption of these devices, the value of VPD per Ampere delivered, the number of GPUs or TPUs, when you do that math, the numbers get very, very large very quickly, even in 2026 and '27 is going to be a big step up relative to '26. So we have to say, as with everything, you got to walk before you run.

Obviously, our licensing practice is well established. We got a methodology, but we have to start at a certain level in order to make it easy enough to adopt, right? Obviously, we've got a pace now of actions at the ITC. We're going to be accelerating that pace. And our strategy very simply is to make it a no-brainer for either hyperscalers or OEMs to take a license from Vicor. I mean these licenses are typically a couple of years. They come up for renewal. And the logic of having them as 2-year licenses is that for one thing, particularly in AI, it's very hard to forecast what their consumption is going to be down the road, right? But beyond that, as the number of patents that we successfully assert and the overall coverage in terms of power system technology gets expanded, the value that we can deliver grows.

So we have an opportunity to bring about more revenue licensing in particular out of this initiative think about it this way. There's hundreds of billions of dollars of AR hardware, right? Couple that observation with the proposition I made earlier, which is that without VPD, there isn't going to be an AI hardware. And that's a piece of technology that V pioneer and patented. You couple those 2 statements and you can begin to do the math with respect to what the licensing business should be worth.

[ John Barr ] with Needham Mutual Funds. So as AI processors get larger, the packaging requirements are going to be more complicated. And in particular, the organic may shift to glass panels, glass substrates, glass interposers instead of silicon. What does that mean for Vicor and VPD?

Well, so to your point, the packaging technology is a key enabler with respect to advances in compute. I'm not an expert with respect to the compute side of it. I am with respect to the power systems side. And I can tell you, looking at it from the power system perspective that these advances are aligned with our power system technology. And the 2 key attributes that Phil pointed to in his presentation that there are 2 key parameters at play from the power system technology perspective.

One is current density. Years ago, it was not that long ago. It was unimaginable to have a requirement above 1 amp per square millimeter. We had the capability, but there wasn't a need. These advances with respect to packaging technology are going to facilitate even greater current density demand. But then coupled with that, there is another key performance attribute that the competition is oblivious to, and that is current multiplication. All the competitors rely on an averaging methodology for regulating a voltage, sub-1 volt from a voltage source that needs to be relatively close in its voltage level because you can only average down so much. And with that comes essentially very limited current gain, maybe 2, 3, 4, 5. And if you try to make it a little higher, then the current density suffers and the current density is no longer good enough.

So Phil had this dot off the chart here, that's where Vicor is to the competition. And that's what advanced AI will need to have because if you just have current density without current gain, you can't bring the power to the point of load where the point of load regulators or current multipliers are located. You need current multiplication with our existing solution. The first one that's going to go into production. We have 40:1. The one step up that is referenced in Phil's presentation that we're going to accelerate. That will bring about an increase in the car multiplier from 40:1 to 56:1, okay? And that's a 40% increase in car multiplication. And that's an enabler with respect to not just making it easier to deliver more power by bringing it across the so-called PDN or power distribution network going down to a wafer scale engine, with all of its, again, mechanical thermal management constraints, but will also enable greater current density at the point of load.

So we're aligned with these trends that ultimately, to your point, are driven by the continuing advances that are taking place with respect to the compute technology as node voltages get to fin and fine lithography. And here again, Vicor has the right technology, and I would submit everybody else is hanging on to a VR or an IVR that isn't going to be able to keep up because as the node keeps going down in terms of nanometers, it wasn't that long ago, it was double-digit nanometers and then 5-nanometer, 3-nanometer. The voltage level keeps going lower. And as that voltage level goes lower, you can take advantage of even more because the power dissipation is mitigated by the lower voltage. The averaging engines, the VRs, the IVRs are more and more challenged with the lower voltages, whereas with our current multiplier technology, we can just go to a higher multiplication factor and deliver more power at a lower voltage with they increasing current capability.

[ Tim Wilkerson ], private investor. As you see more and more states and municipalities considering moratoriums on data centers, do you have any fear or concerns on those potential headwinds, particularly when you see a state like New York passing a bill hasn't been signed yet, but setting the floor so low at 20 megawatts.

Number one, do you have concerns with those efforts? And you see them on both sides of the political spectrum, which is even more troubling. And two, are you starting to incorporate those legislative efforts into your sales campaign to say we're more energy efficient. We're going to help you keep under those potential barriers?

I think there are bigger forces at play there than Vicor can master, right? So the drive to continue to advance AI capability is so powerful that -- to your point, there's going to be limits in some parts of the country, politicians will want to limit what they locally support. But I think that the growth in data centers, the growth in the power within the data centers, the need to, in effect, pack a lot more compute capability within each data center because of all these constraints, that's going to keep going up.

I think we've heard with SpaceX going public that there's a drive to put up data center capability in space. I'm a bit skeptical with respect to that, lots of fundamental challenges with that. I think these things are going to be located around the globe for quite some time to come. They'll find both the power delivery and the space that is needed, I think.

I'm [ Neil G ], an individual investor. A few years ago, when we talked about Vicor, your products were being sold into 2 markets, AI and electronic vehicles. Nothing has been said thus far in this meeting about the EV market. What's happening there and also the charging stations, too?

Okay. So in the presentation today, I wanted to focus on the growth markets that move the needle, if you like, in the next 3 years, right? And we've had a very, very active engagement with EV companies all over the globe. We still have today double-digit collaborations going on where R&D groups are looking at Vicor technology and so forth. But outside of one customer in Europe, high-performance company in Europe, which is going to ramp into production next year, and it's reasonable business for us. We haven't had that breakthrough, right, with a big OEM with a big platform. That hasn't happened yet. And there are lots and lots of reasons in the EV market as it's been changing and moving and forming in different directions that have caused that. So I think that's something maybe for the future. But I think right now, our focus on these 3 markets, industrial, aerospace and defense and AI is going to get us to our $2.5 billion target.

Okay. And I was a retail broker for 35 years. And I had no problems marketing a stock that was $18 when I first bought Vicor. However, I'd have a lot of problems marketing to the individual investor stock at $300-plus. Have you considered perhaps splitting the stock?

I think it's a very, very early kind of conversation. It has come up, but not in any significant way as yet. But it's -- I think you're right. I mean it does come up as the stock gets to that price.

By the way, in the electric vehicle market, there may be licensing opportunities. I'm not suggesting anything imminent, but our presence in that market beyond some lead customer in high-end [indiscernible] has got potential from the licensing business side. The characteristics of the automotive market are such that if we are capacity limited or close to being capacity limited from a product revenue perspective, there is low-hanging fruits, right, and more margin opportunity and profitability elsewhere. So that's part of being selective.

But being there and understanding what is going on with respect to these applications and having visibility with respect to what automotive OEMs are doing also represent opportunity for our licensing model because we've been focused and we continue to be focused in the AI market for obvious reasons. Our technology has got applications in other end markets, including automotive.

And I think this would probably be timing for our last question. Go ahead.

I believe you said your lead customer will be 15% to 20% of revenue this year and accelerating even more next year. But just curious to hear your thoughts on the end market split between your other end markets for revenue this year and next year.

Yes. I'm not sure I follow. You said 20% is what?

For your lead customer?

Yes, that's right. I said 15% to 20% this year. I think very hard to predict exactly. But certainly, a significant step-up next year could be 25%, 30%, yes.

And then can you just talk about how you view your other end markets like industrial and aerospace and defense performing next year or revenue contribution?

Do you want to answer that?

So if you look at the split, it's probably aerospace and defense, industrial, about 50% and then high-performance compute, making up the rest with our IP licensing business on top of that for next year.

Okay. Thank you. As it appears there's no more questions, I'll adjourn the 2026 Annual Meeting of Stockholders. Thank you, everyone.

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.