Note: This is an earnings call transcript. Content may contain errors.

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DATE

Tuesday, October 21, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Patrizio Vinciarelli

Chief Financial Officer — James F. Schmidt

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

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TAKEAWAYS

Total Revenue -- $110.4 million in product revenues and licensing income for Q3 2025, up 18.5% year-over-year but down 21.7% sequentially, reflecting the absence of the prior quarter's $45 million patent litigation settlement.

Advanced Products Revenue -- $65.5 million, up 8.2% sequentially.

Brick Products Revenue -- $44.9 million, up 26.6% sequentially.

Shipments to Stocking Distributors -- Increased 39% sequentially and 46% year over year.

Export Revenue Share -- 42.8% of total, down from 51.9% in the prior quarter.

Gross Margin -- 57.5% gross margin for Q3 2025, down 780 basis points sequentially due to the absence of the litigation settlement, but up 840 basis points year-over-year.

Equity-Based Compensation Expense -- $4.4 million total, broken down as $1.024 million in cost of goods, $2.117 million in SG&A, and $1.221 million in R&D.

Income Tax Benefit -- $5 million with an effective tax rate of negative 21.4%, attributed to the One Big Beautiful Bill Act enabling immediate R&D expensing.

Net Income -- $28.3 million with diluted earnings per share of $0.63, based on a diluted share count of 44.93 million shares for Q3 2025.

Cash Balance -- $362.4 million, up $23.8 million sequentially, after $15.6 million of share repurchases.

Operating Cash Flow -- $38.5 million.

Book-to-Bill Ratio -- 0.98, with one-year backlog down 1.5% sequentially at $152.8 million.

IP Licensing Revenue Run Rate -- Approximately $90 million per year.

Licensing Revenue Growth Outlook -- Patrizio Vinciarelli stated, "we expect licensing income to grow at a rate of approximately 50% per year."

Fab Utilization -- According to James F. Schmidt, "fab utilization remained low, as reflected in low product margins due to under absorption."

Second-Generation VPD, Gen 5 Chips -- Production launch for the lead customer targeted for Q1 2026, with qualification engagements open with major OEMs and a hyperscaler.

Yield for High-Volume Module -- Patrizio Vinciarelli said, "Oh, yeah. That's a very good yield in this industry. It's a record yield for us. It's a great yield. Okay. And to be clear, that's for a particular module that we make upwards of 100,000 a month. So that will not be applicable to devices that are not in mass production."

Q4 Tax Rate Expectation -- James F. Schmidt said, "I can tell you that fourth quarter would be low single digits, our expectation."

SUMMARY

Vicor (VICR +30.33%) indicated that licensing revenue growth derives from newly signed and expanded agreements, including a two-year arrangement with an existing licensee that included both current and catch-up payments recorded in Q3 2025. Management highlighted that all current licensing revenue stems from original power module patents, with no vertical power delivery (VPD) IP yet asserted or monetized. The completed $1 billion Andover chip fab now operates with industry-leading yield and cycle times, though underutilization continues to weigh on product gross margins. The leadership explained that Vicor's second-generation VPD solution exceeds industry specifications—enabling thinner packages at higher current densities than rivals—and named production and qualification timelines for both the lead customer and new engagements with major hyperscalers and OEMs. Executives emphasized Vicor's ability to negotiate flexible licensing arrangements, noting recurring, escalating, or fixed royalties as determined by customer needs, without requiring upfront license fees.

Patrizio Vinciarelli detailed the ongoing impact of U.S. exclusion orders from the ITC case, stating these will affect OEMs and hyperscalers dependent on infringing products for "the life of the patents." according to Patrizio Vinciarelli

James F. Schmidt highlighted internal manufacturing improvements: "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."

Philip D. Davies described Vicor's competitive differentiation, stating their VPD enables current densities up to five amperes per square millimeter in a "1.5 millimeter thin thermally adept package," according to Philip D. Davies, eliminating mechanical and thermal hurdles faced by conventional approaches.

Vicor targets full fab utilization and top-line expansion through accelerating adoption of second-generation VPD, with management asserting industry roadmaps increasingly require IP licensing or risk exclusion from critical markets.

INDUSTRY GLOSSARY

VPD (Vertical Power Delivery): An advanced power architecture delivering extremely high current densities directly to processor packages, surpassing conventional voltage regulator-based approaches.

IBA (Intermediate Bus Architecture): A traditional power distribution design for electronics relying on an intermediate step-down voltage before delivery to the final load.

VR (Voltage Regulator): Device converting and regulating voltage for processors, limited in current density and package thickness.

IVR (Integrated Voltage Regulator): A voltage regulator implemented within a processor package, enabling finer power management but constrained by efficiency at low bus voltages and current limits.

Book-to-Bill Ratio: A measure of new orders relative to shipments, with values below 1.0 indicating order intake lags revenue conversion.

Full Conference Call Transcript

James F. Schmidt: Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2025. I'm James F. Schmidt, Chief Financial Officer. I am in Andover with Patrizio Vinciarelli, Chief Executive Officer, and Philip D. Davies, Corporate Vice President, Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three and nine 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 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, 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-Ks, 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 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 Philip D. Davies will review recent market developments, and Patrizio Vinciarelli, Philip D. Davies, 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 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 2025 total of $141 million, which benefited from a $45 million patent litigation settlement, and up 18.5% from the 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 to $44.9 million. Shipments to stocking distributors increased 39% sequentially and increased 46% year over year.

Exports for the third quarter decreased sequentially, as a percentage of total revenue, to approximately 42.8% from the prior quarter's 51.9%. For Q3, Advanced Products share of total revenue decreased to 59.3% compared to 63.1% for 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 2025 $42.6 million.

The sequential decrease was primarily due to an 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 were $1.024 million, $2.117 million, and $1.221 million, 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 that occurred 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 44.93 million shares, reduced by share repurchases within the quarter. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $362.4 million in Q3, an increase of $23.8 million sequentially and net of approximately $15.6 million share repurchases during the quarter. Accounts receivable, net of reserves, totaled $53.3 million at quarter end.

We have those for trade receivables at thirty-eight 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 per quarter. Capital expenditures for Q3 totaled $4 million. We ended the quarter with a construction in progress balance, primarily for manufacturing equipment, of approximately $8.3 million, and with approximately $2.04 million remaining to be spent. I'll now address bookings and backlog. Q3 book-to-bill came in at 0.98, and one-year backlog decreased 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 the licensing revenue run rate of nearly $90 million per year. Over the next two years, we expect to substantially expand our licensing business, as Vicor IP will be used in most AI applications, necessitating additional licenses, renewal of existing licenses, or expansion of their scope. 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 remained low, as reflected in low product margins due to under absorption, we expect that performance levels achieved by fifth-generation chips and second-generation VPD will soon bring about some substantial capacity utilization. As we said on last quarter's earnings call, 2025 is the year of uncertainty and opportunity. As of today, the quarterly and annual outcome in terms of top line and bottom line went to 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, Philip D. Davies will provide an overview of recent market developments, and then Patrizio Vinciarelli, Philip D. Davies, and I will take your questions.

I ask that you limit yourselves to one question and a related follow-up so that 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.

Philip D. Davies: 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 processor. Advances in power density measured in kilowatts per cubic inch at the rack level and advances in current density measured in amperes per 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 are affecting critical AI metrics of Poken's 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, the 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 voltage as low as 1.8 volts.

Unlike 800-volt power distribution, at 1.8 volts is inefficient and requires low output voltage bus converters that are also inefficient. Raising the intermediate bus voltage would 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 IVRs are current density limited to 1.5 amps per square millimeter, while GPU and TPU roadmaps call for current densities above three 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 the Vicor second-generation VPD enabled by Vicor's fifth-generation current multiplier technology with up to 24 times higher current gain than VRs and IVRs in a 1.5 millimeter thin thermally adept package, with up to five 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 for 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 who 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: Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone. And wait for your name to be announced. To remove yourself, press 11 again. And our first question comes from the line of Nathaniel Quinn Bolton with Needham and Company. Please proceed.

Nathaniel Quinn Bolton: Hey, Patrizio, Philip, and James. Congratulations on the nice results and especially on the IP 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 the 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?

Patrizio Vinciarelli: So to your point, we're able to come to a compromise and accommodation with an existing licensee who took an additional license for a time period of two years. Some of that two-year time frame, to your point, is in the past. So within the quarter, we recorded the payment that includes a catch-up for a few months of the year. There are going to be recurring payments every quarter, and in terms of answering your question as to where licensing income is going, I think as we commented in the press release yesterday, licensing income is going up substantially.

As James 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 preparing to execute.

Nathaniel Quinn Bolton: Oh, that's great. Thank you, Patrizio. 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 MVM modules as part of the agreement? In the press release yesterday where you talked about the $300 million of IP-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 related to license agreements?

Patrizio Vinciarelli: 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, you know, the current level of, if you will, the licensing business component of Vicor. Which at this point in time should no longer be viewed as just a power module maker, but should be viewed in terms of assessing its value as the combination of two businesses.

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

Nathaniel Quinn Bolton: Fine. I'll get back in queue. Thank you.

Operator: Thank you. Our next question is from Jonathan Tanwanteng with CJS Securities. Please proceed.

Jonathan Tanwanteng: Hi. Good afternoon, and thank you for taking my question, and 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 terms with that caused the sequential jump? Or were there other licensees that you signed up and other royalty streams related to that?

Patrizio Vinciarelli: So I guess, as we look back at what has come about this year, on the eve of the father's elimination from the International Trade Commission of the first ITC case, which has, you know, resulted in an exclusion order. Prior to that, we signed up a substantial hyperscaler. So that was in general. Now we then settled the dispute with one of the respondents in the ITC case. So that came into the second quarter performance. And in the third quarter, we, as I mentioned earlier, entered into a second license with an existing licensee that's here as a first license. So that's been the progression.

Jonathan Tanwanteng: Okay. Great. Thank you. 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 booking to bill. Just backing into it. Is that just the catch-up from the tariff headwind that you faced, or is there more organic demand there underlying that?

Patrizio Vinciarelli: Well, so depending on end markets, there is a different level of activity. Philip can tell you more about that in a moment. But, you know, from my perspective, we've been allowed in terms of growth in product bookings and shipments, for a combination of reasons. Which, effectively address the delivery of generation components and second-generation vertical power delivery. So, as suggested in James's earlier remarks, we expect to fill the fab. As we do that, and no longer suffer from significant under absorption, having, you know, that put a lot of capacity in place in a distribution of demand, we're going to see all of these parameters grow substantially, starting with bookings, backlog, and the top line.

Philip D. Davies: Yeah. Jonathan, as I mentioned on the last call, I see the, you know, 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.

Jonathan Tanwanteng: Got it. That's helpful. Thank you. And I'll jump back in queue.

Operator: Thank you. Our next question comes from Richard Shannon with Craig Hallum Capital Group. Please proceed.

Richard Cutts Shannon: Well, hi, guys. Thanks for taking a couple of my questions as well. I think I'll address kind of a two-part question here on the IT revenues here. First of all, I'd like to get a sense here of how many customers do you have licensed now? And I certainly understand that one of them has two different licenses. You know, how many that you might expect here over the next, you know, couple of years or so? And then, last call, talked about the potential. 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 2026.

You didn't use that language today. Although the previous answer from Patrizio suggested that's the case, but just want to confirm that's possible.

Patrizio Vinciarelli: Okay. Let me start with the last one, then 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 LIGO one, our first ITC action, has been growing. And, we've been able to, you know, 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 effect, directly involved in that case. But because of dependencies on manufacturers that were respondents in those cases, it will affect, for the foreseeable future, any other OEM and hyperscaler that is dependent on those infringing products. Let me go to the other part of your question with respect to how many licensees that we signed up. You know, how many do we expect to sign up? It's first by addressing the second part. We expect in the next couple of years to sign up each OEM and each hyperscaler in the AI space. The data center space. No.

That's not going to be easy. But given our visibility with respect to the product roadmaps, the existing solutions, the coverage of our comprehensive plan portfolio, over various aspects of bus conversion, density bus conversion over a wide range of voltages, all the way to the point of load with respect to first-generation BPD, which we probably invented, but chose not to practice, because of its limitations. I don't see any other tailor or OEM with, in effect, a state-of-the-art solution being able to do without Vicor power system IP.

We have a very well thought out and obviously, it's been a very effective strategy to assert IT, protect our innovations, and get compensated for it, and I see that continue to stand in involving the entire marketplace of OEMs and hyperscalers.

Richard Cutts Shannon: Okay. Great. Thanks for that detailed answer, Patrizio. 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. Wondering if you can provide any more details on how long this has been going on, you know, applications that you're working with, and how long you expect the qualification process to last. Thank you.

Philip D. Davies: Hi, Richard. It's Philip. 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, you know, 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 two or three companies, a hyperscaler and a couple of OEMs, that offer major, major growth. They have huge potentials because of their scale in terms of both the hyperscaler 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 BPD solutions, infringing BPD solutions, albeit, but they have not been able to meet the specifications that they put forward to the competitors, so-called competitors of Vicor. And 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 preproduction, it's probably the second half of next year, and towards the end of Q3 going into Q4.

Richard Cutts Shannon: Alrighty. Great. Thank you, guys.

Operator: Thank you. Our next question is from John Dillon with DNB Capital. Please proceed.

John Dillon: Hi, guys. Congratulations. It's really good news all around. Philip, I've got a follow-up question to Richard's, 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?

Patrizio Vinciarelli: I'll take that one. So to date, we deliver units to the regional target. We're working on the 133%. 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 on our way to the set goal of 133%. But thus far, we met the goal of the general current requirement.

Philip D. Davies: And then, John, let me just add to that even the 100% goal that we've hit with our lead customer is significant enough to get design wins with these other customers I'm talking about. Alright? So we're so far ahead even though the competition that you know, they're looking at Vicor because it's not just current density. I mentioned the, you know, the thinness of the package. They're also telling us they need solutions below three millimeters in height. And no one is able to do that. They're all at about five millimeters. So that's a critical spec as well. We hit that 50% smaller than what they want. So you know, 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.

Patrizio Vinciarelli: Let me add a comment to that. Regarding thickness. Right? So VR solutions with gearboxes and so on and forth are quite thick. Seven millimeters. Quite clumsy. It thermally inept as opposed to that. Very difficult to thermal emerge. Very costly. Not inherently reliable. There are IVRs, which are thinner and are capable of up to about one and a half amps per square millimeter current density. But they're challenging in other respects, which is in order to achieve the level of current density, they need to be supplied with 1.8 volts. Which at high power levels implies huge currents that need to get delivered at such a low voltage very close to the point of load.

And that was one of the points that Philip and his prepared remarks made. So for any customer seeking a VPD solution and looking at conventional approaches, you know, ranging from traditional VRs to IVRs, which is in a way a renewed attempt, a debt which Intel did with Fiver 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 powered nowadays from five or six volts. So power delivery to a VR is not quite as challenged as 1.8 volts. But then the VRs are thicker, in terms of adult solution. They're much, much run at a much lower frequency.

They have poor duty cycle. So that's Philip's point with respect to pick your poison if you want to raise the intermediate bus voltage in order to get somewhat more efficient power distribution. Your challenge in a voltage regulator, which works on average in principle, right, is dividing a voltage by fundamentally mixing that voltage source with ground. And as you raise the level of the source, as the upper voltage gets close to ground, you have to operate with a very low duty cycle, which is inefficient. Or in the alternative, you make the duty cycle 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, they're not current gain. And they insert a loss in the case of IVRs, which is upward of 10%, and for that loss, you only get a factor of two current gain. Which is nothing if the GPU, TPU needs thousands of amperes. Right? I think it's been noted that the typical house power inlet is 150 amps. Obviously, it's a much higher volt that you can power a whole house. But the challenges of distributing a thousand amps at 1.8 volts are a significant handicap with respect to IVRs.

So they all have their trade-offs, they're all fundamentally constrained by the same laws of physics, which lacking current gain, make them somewhat handicapped with respect to keeping up with processor roadmaps and processor current density requirements.

John Dillon: Yeah. Yeah. I get that. Because of Ohm's Law, the low voltage is really gonna be a handicap for them, and they're gonna have incredible transmission losses and extra heat that they've gotta remove. So I get that. It's good. A great explanation.

Patrizio Vinciarelli: It's not just Ohm's Law. It's Kirchhoff's laws. There's a few laws that apply. But the bottom line is they're up against those of physics, which are not changing. Right?

John Dillon: Yep. And fundamentally, they can make a trade-off, make a different trade-off, they gain in one respect, but then they lose in another. And that's the dilemma that is ongoing with respect to that approach to powering AI.

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

Philip D. Davies: I think we were talking about different customers. Yeah. So the lead customer is Q1, John. I know I was talking about other customers next year in the second half. End of Q3, Q4 for other customers. For production.

John Dillon: How are you doing how are you getting from prototype to production so quickly? That's incredible. I mean, that's really fast.

Patrizio Vinciarelli: Okay. Well, so the problem metrics with respect to current multipliers, attire or lower current levels. It's extremely scalable. We're going to have repeat makeup ready for sampling. And then when it comes to the adoption timeline, it's to a high degree, accelerated by the need for a solution lacking acceptable alternative solution based on conventional technology again, VRs, IVRs, and an IBA architecture. That's handicapping solutions. So, you know, I can tell you that even though subsequent generations of GPU have used biotechnology, at least for bus conversion, now then, as in terms of its power system, deliver the requisite power car level. That the Silicon team had marketed.

And this is a compromise that is, you know, very challenging clearly, particularly as the AI space gets more competitive with obviously, some increase in credible threats of competitive alternatives.

Philip D. Davies: Yeah. 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 where in full control with short cycle times. Right? So a lot of other things going into that and that are advantageous for us getting to production in Q1 next year.

John Dillon: Congratulations. This is great news. Great job, guys.

James F. Schmidt: I'd just like to add to what Philip has said, which is, you know, the cycle time, and it might be an opportune time to mention how different Vicor is now compared to a couple of years ago. 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 one point I made in my prepared remarks, under absorption 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 loading the factory, yet we're absorbing under absorption variances. So that's a future state for us to all be very optimistic about.

John Dillon: Congratulations. I'll get back in the queue. Great job, guys. Great job.

Operator: Thank you. Our next question comes from the line of Patrick Connors with Ajax Capital. Please proceed.

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

Patrizio Vinciarelli: So that's always been an issue. And will remain an issue. We have, you know, ways to deal with that. Obviously, a licensing practice provides opportunity for multisourcing, but in and of 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 an 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 issues.

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 DIP 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.

Patrick Connors: 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 clue as would that satisfy your lead customer?

Patrizio Vinciarelli: Oh, yeah. That's a very good yield in this industry. It's a record yield for us. It's a great yield. Okay. And to be clear, that's for a particular module that we make upwards of 100,000 a month. So that will not be applicable to devices that are not in mass production.

Patrick Connors: Okay. Thank you, guys. Congratulations.

Patrizio Vinciarelli: Thank you. Thank you.

Operator: Our next question comes from the line of Nathaniel Quinn Bolton with Needham and Company. Please proceed.

Nathaniel Quinn Bolton: Hey, guys. 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 two or the licenses you have in hand, does that include vertical power or not?

Patrizio Vinciarelli: It does not include vertical power. It only stems from the assertion of IP to a few certain patents that we have to a VM technology. We have other patents to some VMs, we have lots of patents with respect to VPT power package. None of these have been asserted yet. Now, as I mentioned earlier, the first linear exclusion order there with respect to those files were found to infringe. Is going to be enforced for many, many years. And it's going to be enforced more broadly as time goes on, and we identify the customs, US customs, the infringing 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 contract manufacturers. And in fact, it's one of these kind of developments that led us to the license that was entered into in the third quarter. But all of the actions, absolutely, have been revolving around the very first case.

Nathaniel Quinn Bolton: The very first case. So 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.

Patrizio Vinciarelli: Absolutely. So the hyperscalers and OEMs that we've been communicating with over time, in some cases, before three years or more. They understand how a licensing practice works. The cost of a license in terms of royalty rates starts at the level that is very attractive relative to taking a license at the later stage. And we have seven stages. Ranging from a stage where there's been complaints filed, no litigation, where the rates are attractive. To what we call stage seven, which is after this injunction or customs stop the importation of infringing products into the US.

There is every incentive for OEMs and hyperscalers to take a license proactively, right, as opposed to playing a game of catch me if you can. Because if they play that game, I think we already demonstrated it will catch them. That's going to be very, very expensive.

Nathaniel Quinn Bolton: Got it. And then a quick one for James. James, you mentioned the One Big Beautiful Bill caused 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 with the tax rate given the One Big Beautiful Bill?

James F. Schmidt: Yep. 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 digits, our expectation.

Nathaniel Quinn Bolton: Okay. Thank you, James.

Operator: Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press 11 on your telephone. And we have a question from the line of Mr. Neil Gore. Please proceed.

Neil Gore: Hello. 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.

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

Neil Gore: Okay. And the companies that have been licensing from you for more than a year, is their revenue growing on a regular basis or is it pretty flat?

Patrizio Vinciarelli: So I think we have examples of those. So we have one example with a hyperscaler where the royalty rates, you know, increase 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.

Neil Gore: Okay. And one last thing. About two years ago, you said you were planning to be a billion-dollar company. Most companies have five-year plans. Are you on track to achieve what your plan was initially set out for? Within the time frame that you thought you were gonna achieve it?

Patrizio Vinciarelli: Yeah. So we are almost halfway 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 that last three quarters. I think, as suggested in answer to questions going back to about this time last year when I think I stuck my neck out indicating that this was going to be a record year for Vicor. It's playing out as James summarized earlier, to be a record year in all respects. Top line, bottom line, EPS. But we are not quite halfway there to $1 billion. So what's going to get us there?

Well, filling the fab by itself will get us just on prior revenues past $1 billion. Because actually, the capacity of that fab is being going up. Particularly with fifth-generation products, second-generation VPD, devices, which being thinner have faster cycle time, and higher capacity per pound. Through the fab. So needless to say, if we were to fill the fab, it would be just on the product revenues. Beyond $1 billion. The licensing business as of a snapshot in the third quarter, is at the $90 million run rate. You know, I can't tell you what's going to happen next quarter or what after that. There could be additional licensing deals that might not yet happen.

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 to realize that, if products use Vicor IP, they need to have a license, so those products aren't going to ship. So the licensing business by itself is suggested earlier. From $90 million can get to a couple $100 million. 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.

Neil Gore: Thank you very much.

Operator: Thank you. And we have a question from the line of John Dillon with DNB Capital. Please proceed.

John Dillon: Yes. Thank you again for taking this call. 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, is there anything on the horizon that can power a 6,000 amp processor besides Vicor?

Patrizio Vinciarelli: Well, I frankly believe that even at the 2,000 amp level, VRs and IVRs and bus converters delivering that kind of power, kilowatts. Either five, six volts. In the case of IVRs, 1.8 volts, you know, those things are fundamentally challenged. I think if we look at GPU companies, they haven't been able to go to VPD because it's really not practical. It's not mature. Because it's first-generation VPD, and it's got the complexities that Philip summarized in his prepared remarks. Right? It requires lots of layers. You know, hard to put together, hard to assemble on the back of the processor, heat getting trapped, lots of issues. Even at the level of a thousand. Never mind 2,000 or more.

Now there is one large hyperscaler that has gone very far with respect to the BPD. But again, suffering from the same kinds of challenges and difficulty seeing how the GPU, TPU roadmap in future years is going to be supported by power system capabilities that are readily available a lot of these resources.

John Dillon: Sounds like there's nothing out there that we'll be able to handle 6,000 amps. So it all depends, you know, on this has got 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 engine. As opposed to, yeah. So 6,000 amps if our wafer scale engine would 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 nothing terribly magic about 1,000 amps, 2,000 amps, 6,000 amps, or 50,000 amps.

I think the more relevant metric, right, the figure of merit that matters is the current density. And relating to that, the current multiplication. What you need in order not to get in the way of AI processor roadmaps is you have to have very high current density. Several amps per square millimeter and rising, number one, and you have to have high current multiplication. Because if you don't have high current multiplication, then you're stuck at the entry point to the point of load processor. Which is fundamentally the predicament of IVRs.

John Dillon: Yeah, and that's my point. It sounds like Vicor is the only one who's gonna be able to handle these new processors that are gonna be running these kinds of amperes.

Patrizio Vinciarelli: I'm not good enough to know. It's always dangerous to make absolute statements. Right? But I understand. We don't know what we don't know. Yeah. I'm not aware of any other company that can address the roadmap requirements in terms of high enough current density with enough current multiplication. Vicor is the only company with that technology, the pioneer of that, heavily patented, many, many different perspectives. And it just began to show the industry that anybody chasing our track is going to have a serious problem. You might recall me saying in the past that a bad portfolio is a landmine. We began to see the effect of people stepping over the perimeter of that landmine field.

John Dillon: I get it. I get it. Then, Philip, you had answered a question about the NBM sales as a result of the licensing contracts with their incentives to take product. What I was wondering is, are we gonna start seeing an increase in NBM sales in the next quarter or two?

Philip D. Davies: Right. I think that, you know, the NBMs that we have are, you know, super for a lot of different applications. But the focus for us, John, is really as Patrizio 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 BPD solution and current multiplication at the point of load as Patrizio just explained. That's the future. That's the growth for the company.

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

Philip D. Davies: We'll see some sales. Yeah. The sales point. But it's not that they call the salad. Right?

John Dillon: Totally get it. Great job. Great job, guys. Thank you.

Operator: Thank you. 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.