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DATE

Tue, Oct. 20, 2026

CALL PARTICIPANTS

• Chief Financial Officer - Jim Schmidt
• Chief Executive Officer - Patrizio Vinciarelli
• Corporate Vice President, Global Sales and - Philip D. Davies

TAKEAWAYS

• Total Revenue -- $197.1 million, representing a 37.5% sequential increase from the second quarter and a 78.5% increase from the prior year.
• Advanced Products Revenue -- $139 million, increasing 47.5% sequentially to account for 70.4% of total revenue.
• Royalty Revenue -- $66.6 million, representing a 119.1% increase from the previous quarter, with management establishing a $43 million baseline for future periods.
• Gross Margin -- 68.3%, reflecting a 1,030 basis point increase from the third quarter of 2025 driven by higher licensing income and volume efficiencies.
• Net Income -- $63.3 million, or $1.33 per diluted share, compared to $49.8 million in the preceding quarter.
• Backlog -- $406 million, representing a 7% sequential increase and a 166% increase from $153 million at the end of the third quarter of 2025.
• Cash and Cash Equivalents -- $513.1 million, reflecting a sequential increase of $59.6 million from June 30, 2026.
• Operating Expenses -- $62.5 million, which included $16.1 million in legal fees associated with intellectual property enforcement.
• Capital Expenditures -- $16.1 million for the quarter, with approximately $48.6 million in remaining spend projected for manufacturing equipment construction.
• Fourth Quarter Product Revenue Guidance -- 10% sequential growth expected, supported by a double-digit increase in the Advanced Products portfolio.
• Fourth Quarter Royalty Guidance -- Minimum of $43 million, assuming no additional licensing agreements are closed during the period.
• October Bookings -- $100 million recorded in the first two weeks of the fourth quarter, driven by second-generation VPD module orders.
• Book-to-Bill Ratio -- Recorded above 1.1 for the third quarter.
• Export Revenue -- 36.1% of total revenue, a decrease from 46% in the previous quarter.
• Brick Products Revenue -- $58.3 million, representing an 18.4% sequential increase and 29% of total revenue.
• Accounts Receivable -- $122.5 million, with days sales outstanding for trade receivables at 34 days.
• Inventory -- $110.9 million, a 6.2% sequential increase with 2.3 annualized turns.
• ATE Segment Revenue -- Over $100 million in annual revenues from leading ASIC and memory test system customers.
• Manufacturing Capacity Expansion -- Target of a fivefold increase in output through the acquisition of sites for Chip Fab 2 and Chip Fab 3.
• Effective Tax Rate -- 19.6% for the third quarter, reflecting a tax provision of $15.4 million.
• Shipments to Stocking Distributors -- Increased 24.8% sequentially and 16.2% year over year.
• Legal Expense Ratio -- Management expects legal costs to average 20% of royalty revenue in the near term.
• Share Count -- 47.6 million fully diluted shares for the third quarter.

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RISKS

• Vinciarelli stated, "Unfortunately, for the near term, we have certain capacity limitations... dependent on specific platforms related to particular process steps," indicating that existing infrastructure at Fab 1 is approaching full utilization.

SUMMARY

Vicor Corporation (VICR +5.80%) reported a sequential increase in total revenue driven by growth in its Advanced Products portfolio and royalty income from new licensing agreements. Management indicated that net income and gross margins reached levels approaching long-term financial targets as the company expanded its intellectual property enforcement efforts. The company stated it has secured two additional manufacturing sites to facilitate the long-term expansion of production capacity to meet demand for its Vertical Power Delivery modules. Management reported that the International Trade Commission has initiated an investigation into patent infringement, which is expected to support the company's licensing practice among hyperscalers and original equipment manufacturers.

• Management reported the acquisition of two additional sites for Chip Fab 2 and Chip Fab 3, located within 30 miles of the Andover facility, to support long-term capacity expansion.
• CEO Vinciarelli stated, "The AI constraints have to do with the point of load," noting that second-generation VPD modules address these requirements through high current density and current gain.
• Management confirmed that the International Trade Commission has instituted an investigation into VPD patent infringement, which the company expects will prompt unlicensed equipment manufacturers to seek licensing agreements.
• Philip Davies noted that demo systems for second-generation VPD and dual FPA are now operational in a Silicon Valley laboratory for engagement with hyperscalers and equipment manufacturers.
• Management stated that its licensing practice uses royalty rates that escalate through four distinct stages to encourage early adoption before legal enforcement actions progress.
• The company indicated it expects to fund the construction of Fab 2 and Fab 3 using internal cash flow without the need for external capital raising.

INDUSTRY GLOSSARY

• VPD: Vertical Power Delivery, a method of delivering power to a processor from beneath the chip to reduce power loss and improve density.
• IVR: Integrated Voltage Regulator, a power management component integrated directly into a processor package.
• FPA: Factorized Power Architecture, a Vicor proprietary power conversion architecture that separates voltage regulation from current multiplication.
• ChiP: Converter housed in Package, Vicor's proprietary packaging technology for high-density power components.
• NBM: Non-isolated Bus Module, a bidirectional fixed-ratio converter used in intermediate bus architectures.
• ITC: International Trade Commission, a U.S. federal agency that investigates patent infringement and can issue exclusion orders barring imports.
• ATE: Automatic Test Equipment, used in the semiconductor industry to test memory and ASIC devices.
• IBA: Intermediate Bus Architecture, a common power distribution method that uses a bus converter to provide a lower intermediate voltage to point-of-load regulators.

Full Conference Call Transcript

Operator Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 26 Vicor Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. And to ask a question during this session, you would need to press *1 on your You would then hear an automated message about and your hand is raised. And to withdraw your question, please press *1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jim Schmidt, Chief Financial Officer. Please go ahead. James F. Schmidt Thank you.

Good morning, and welcome to Vicor Corporation's earnings call for the Third Quarter Ended 09/30/2026. I am Jim Schmidt, Chief Financial Officer. I am in Andover with Patrizio Vinciarelli, Chief Executive Officer and Philip D. Davies, Corporate Vice President, Global Sales and Earlier this morning, we issued a press release summarizing our financial results for the 3 and 9 months ended 09/30/2026. 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 purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 2 thousand. 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 03/02/2026. 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, 10/20/2026. 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 conclusion of this call. A webcast replay of today's call will be available shortly on the Investor Relations page of our website.

I will now turn to a review of our Q3 financial performance. After which Philip will review recent market developments. Patrizio, Philip 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 third quarter of $197 million up 37.5% sequentially from the second quarter of 2026, total of $143 million and up 78.5% from the third quarter of 2025 total of $110 million Advanced Products revenue which includes royalty revenue, increased 47.5% sequentially to $139 million and Brick Products revenue increased 18.4% sequentially to $58.3 million Royalty revenue increased 119.1% to $66.6 million A fraction of this increase due to initial royalty payments from the new licensee was non recurring. As we add more licensees, growth in royalty revenues will be less lumpy. Shipments to stocking distributors increased 24.8% sequentially and increased 16.2% year over year.

Exports for the third quarter decreased sequentially as a percentage of total revenue to approximately 36.1% from the prior quarter's 46%. For Q3, Advanced Products share of total revenue increased to 70.4% compared to 65.7% for the second quarter of 2026, with Brick product share correspondingly decreasing to 29% of total revenue. Turning to Q3 gross margin. We recorded a consolidated gross profit margin of 68.3%, a 40 basis point increase from the prior quarter, Q3 gross margin increased 1.08 thousand basis points from the same quarter last year. Gross margin improved, both as a result of increased royalty revenue as well as better product gross margins as we achieved gains in volume efficiency and mix.

I will now turn to Q3 operating expenses. Total operating expenses increased 29.6% sequentially from the second quarter of 2026 to $62.5 million Within operating expense, legal expense, a substantial portion of which is contingent on royalty revenue, increased by approximately $11.1 million from the second quarter, to $16.1 million On a run rate basis, we expect legal expense to average approximately 20% of royalty revenue in the near term. The amounts of total equity based compensation expense for Q3 included in cost of goods, SG&A and R&D was $1.2 million, $2.65 million and 1.48 million respectively, totaling approximately $5.3 million Turning to income taxes.

We recorded a tax provision for Q3 of approximately $15.4 million representing an effective tax rate for the quarter of 19.6%. Net income for Q3 totaled $63.3 million GAAP diluted income per share was 1.33 based on a fully diluted share count of 47.6 million shares. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $513 million at Q3, an increase of $59.6 million sequentially. Accounts receivable net of reserves totaled $103 million at quarter end, with DSOs for trade receivables at 34 days inventories net of reserves increased 6.2% sequentially to $111 million annualized inventory turns were 2.3 Cash flow provided by operating activities totaled $69.7 million for the quarter.

Capital expenditures for Q3 totaled $16.1 million We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $26.4 million with approximately $48.6 million remaining to be spent. I will now address bookings and backlog. Q3 book-to-bill came in above 1.1. Year-end backlog increased 7% from the prior quarter, closing at $46 million 2026 is the year in which Vicor's innovative products and technology licensing practice came into focus within the industry. With incremental capacity, we expect a 10% increase in Q4 product revenue, and at least $43 million in royalty revenue assuming no new license agreements are closed this quarter.

To achieve the product revenue growth objective, we are expecting another double digit sequential increase in product revenue in our Advanced Products portfolio. In Q3, we achieved operating ratios for both profitability and expense approaching our long term financial model. Further revenue growth will result in further margin expansion. Philip? Philip D. Davies Thank you, Jim. Demand across our main business segments and in our IP licensing practice is strong. With $100 million in bookings in the first 2 weeks of Q4. Which included a large order for second generation VPD modules from our lead AI customer.

The purchase of 2 sites for chip fab 2 and chip fab 3 reflects the need to expand capacity in support of increased demand. Substantial capacity expansion will be necessary based on AI industry trends and customer enthusiasm for our second generation VPD. Meetings held with major hyperscalers and OEMs at last week's open compute confirmed that first generation VPD systems using VRs which infringe VICOR patents, are struggling to keep up with the requirements of next generation AI systems. Our targeted audience was impressed by Vicor's second generation VPD with its distinct manufacturing manufacturability and performance advantages. Open Compute this year focused on 800 volt DC rack distribution through inefficient intermediate bus voltages.

From 12 volts to 6 volts or possibly 1.8 volts to a point of load approaching 0.5 volts. Underscoring the inherent limitations of VRs and IVRs. Lack of adequate current density and current gain at the point of load sets the stage for broader adoption of Vicor's second generation VPD. Providing high current density, and much higher current gain. With its transient performance eliminating voltage undershoots, Vicor proprietary dual FPA enables 10% to 15% reduction in AI processor power loss with over 40x the current gain of IVRs and 3x the current density of VRs.

Demo systems for second-generation VPD and dual FPA have been set up in our Silicon Valley applications laboratory and are available to selected OEM and hyperscaler engagements. On the licensing front, we granted our first VPD license to a leading AI OEM based on stage 2 unit royalty rates. And responded to inquiries from 2 hyperscalers seeking all inclusive licenses. Quoted at stage 2 and stage 3 prior to the recent ITC decision to investigate VPD infringement. Even though leading OEMs have already obtained a license to our VPD patents, others may not have yet realized that they are importing or planning to import infringing products.

Catching their attention, Vicor has requested the ITC to issue a limited exclusion order barring importation of unlicensed computing systems that infringe Vicor's VPD. Like the ITC did before in an earlier investigation involving our NBM patents. As hyperscalers and other OEMs come to realize the impact of an importation ban, they will take licenses based on escalating royalty rates established in our licensing practice which favors early adopters. The decision to focus on a set of top 10 and top 100 customers and top channel accounts or TCAs with our global distribution partners across our 4 markets, and 4 regions globally is clearly paying off with both bookings and opportunity pipeline growth.

Our customers are on the cutting edge of high growth applications. With the toughest power delivery challenges and specifications. Our leading ATE customers for ASIC and memory test systems, which now represents over $100 million in annual revenues, shows no signs of slowing down. And we are actively discussing capacity reservations to ensure supply in coming years. Major new product introductions are also underway in our industrial and aerospace and defense businesses. With market expansion now occurring with new nontraditional companies that have entered the A&D market with new autonomous technologies. Successful execution is achieved with focus. And we are very focused. Thank you, and we will now take your questions. Operator Thank you.

Press *1 on your telephone and wait for your name to be announced. And to withdraw your question. The first question is going to come from Quinn Bolton. With Needham & Company. Your line is open. Analyst (Quinn Bolton) Congratulations on the strong product and licensing outlook. I guess I wanted to start, Jim, just you would mentioned that the royalty revenue in the third quarter is $66.6 million did include some catch up royalties. Wondering if you could help size that in the third quarter. And then I have got a couple of follow ups. James F.

Schmidt It might be best to just think about 43 million that I mentioned, Quinn, as the baseline amount that we can count on now with no new deals? As a starting point for Q4. Analyst (Quinn Bolton) Got it. Okay. So thank you. Patrizio Vinciarelli Quinn, thinking about this, what is the meaning of nonrecurring? I think that which was labeled nonrecurring has been recurring pretty periodically. Right? So as we pointed out, in Q3, there was a contribution that is nonrecurring, but then you know, early in Q4, we get some other contribution. So I think we should all expect that our licensing income is going to be growing.

While we are still in a licensing arrangement with relatively small subset of all of the hyperscalers and OEMs. It is still going to be lumpy. there is going to be more, quote, unquote, nonrecurring contributions it is not going to be until there is a crossing of the chasm with respect to the need to license Vicor technology for freedom to operate in applications given the strong component of Vicor IP that is inherently involved in these systems. But, you know, with some lumpiness, this is going to be a significant growth business that we are now estimating to reach levels next year and the year after that beyond levels that I forecasted a year ago. Philip D.

Davies And, Quinn, I will just add to what Patrizio said. it is better for, I think, the audience and the analyst to think about the royalty stream as recurring. Now. And not a nonrecurring activity, just to put it in perspective. The nature of the agreements are recurring. Analyst (Quinn Bolton) Got it. Yeah. No. But I think I understand that if you sign new licenses, there may be catch ups with those additional license agreements, but the $43 million sounds like a good go forward base, and then, obviously, we can add on to that as the company signs new licenses. Wanted to turn to the second and third chip fab.

I think we are all expecting you to announce a second site. So it was great to see you announce both the second and the third site Can you give us a sense for the second site? When would you think that, that facility would come online and begin contributing to product revenue? Is that a sort of 12-month time line? Is it 18 months? what is a good sort of timeline for investors to be thinking about with that second site? Patrizio Vinciarelli We are actually going to have some initial equipment deployment in Q2. Q2 of 27.

Analyst (Quinn Bolton) And would that be able to produce sort of a full set, or is that just first equipment deliveries, Patrizio? Patrizio Vinciarelli Yeah. So it is going to be incremental steps with respect to those processes where we first ran into capacity limitations in Fab 1. Right? So in Fab 2, we are going to bring up lines that address the shorter term limiting factors and move on from those to other ones. Analyst (Quinn Bolton) Got it. So it may not be sort of full production, a mimic of Fab 1, but you will bring in those production steps where you are most constrained.

Patrizio Vinciarelli So the impact would be to increase the company's total manufacturing beginning in the second quarter. that is right. Yeah. Yeah. But we. For those process steps where we still have ample capacity of Fab 1, there is no need, there is no rush to deploy additional equipment there. So we are going to be able to do it incrementally and more cost effectively and more predictably. Analyst (Quinn Bolton) Got it. And then the last 1 for me. Philip, you mentioned, you know, good meetings at OpenCompute. Last week.

And just kind of wondering if you could address what kind of what demand are you seeing for the factorized power or the 48 core solutions as the VRs and IVRs do look increasingly challenged. When do you think you might see adoption of second gen VPD outside of your lead customer based on some of those conversations? Philip D. Davies So conversations are still early, Quinn, in that regard.

We do have line of sight to, you know, new chips that are under development that are sort of farther out, if you like, But I do think that there could be opportunities in the shorter term based upon the inefficiencies of VRs and IVRs So we will be taking a look at that as we as we move forward. Patrizio Vinciarelli So, again, we are looking at all these opportunities in the frame of reference of capacity limitations. Over the next 12-months.

Right? it is not that we can engage with any hyperscaler OEM that is got a need, visually all of them, do, because as you know, well, there is been a lot going on with respect to 800-volt bus and converting that to 6 volts. 12 volts, or back to 6 volts on the way to 1.8 volt. The real issue with respect to enabling AI does not have to do with what happens, in effect some distance away on an 800-volt bus or even the intermediate bus. The AI constraints have to do with the point of load.

And they have to do as we have been assimilating because of the fact that, IBA, the Intermediate Bus Architecture, which is how the competitive industry has been doing it, is gathering the attention between efficient power distribution and an efficient duty cycle and the requisite current density and current gain at the point of load. As I have been saying for quite some time, the older focus about 800-volt is really missing the bullet with respect to the AI challenge. it is not that there is a benefit to 800-volt. it is a benefit. it is a few percentage points of system efficiency.

But in that point of load power system will keep AI from progressing on its, performance trajectory. And that is what we are following. Understood. Thank you, Patrizio. Operator Thank you. And our next question is going to come from Justin Clare with ROTH Capital Partners. Your line is open. Analyst (Justin Clare) Hey, good morning. Thanks for taking our questions here. First, wanted to start off. So backlog increased to $46 million this quarter. And I was just wondering if you could discuss the visibility that you have now into kind of fully utilizing Fab 1, and when you expect to reach that milestone?

So just looking beyond the backlog, kind of what visibility do you have into additional customer orders or commitments from customers that would support that full utilization. Patrizio Vinciarelli So as of yesterday, the backlog is actually closer to $400 million But beyond that, we see robust demand. Philip and I were on a call yesterday with a major customer seeing demand doubling every year for the next several years. And they have a lot of visibility with respect to the request for their systems. So the challenge in the short term is to bring up additional capacity to do so ahead of demand Sorry. I have a cold. Taking care of customers with many customers.

Most customers, they are single source with us. Where we have obviously a procedure responsibility with respect to ensuring that we are not going to be you know, gating their growth A lot of it is directly AI related. But, some of it is indirectly relayed related in that the AI growth path is fueling, as you know, a growth path for all of the portions of the industry, they play 1 support role or another. Got it. Okay. And then just shifting to the capacity announcements here that you made for Fab 2 and Fab 3. Analyst (Justin Clare) I was wondering if you could just clarify You indicated that those additional sites could increase capacity nearly 5x.

Is that 5x figure related to kind of physical manufacturing space, production output? Or revenue generating capacity? And just wondering if you could potentially share what the revenue potential might be as you move from Fab 1 to Fab 2 and Fab 3, assuming, full utilization of those facilities? Patrizio Vinciarelli So around Fab 1, we are space constrained. In other words, have a relatively small parcel of land. So we make sure with both Fab 2 and Fab 3, to avoid getting limited by, in effect, elbow room within that particular site. Both sites have significant upside, that could support even more than a 5x expansion.

And, again, the methodology for expanding capacity as you might recall, we first looked at just industrial, parcels, then looked at buildings in order to reduce the time to accessing a new facility We ended up doing 1 of each within a triangle. it is about 30 miles off to the west and to the north. Of Fab 1, relatively short distance. But with a significant level of dependency with respect to power feeds and all that would be a consideration regarding the redundancy with respect to this incremental capacity. The 5 x, is a conservative number.

It could be more than that because, again, unlike Fab 1, we are not going to be limited by elbow room within either 1 of these sites. Analyst (Justin Clare) Got it. Okay. And then just 1 more. Wondering if you could share, what you expect in terms of the capital investment for Fab 2 and Fab 3 and what the anticipated timing of that investment would be? Patrizio Vinciarelli So we are not prepared to share any details today. We are in the planning phase with respect to Fab 2. I think possibly as of our next, conference call, we will share some quantitative data with respect to capital investment.

But it is safe to say that we are going to be able to fund, Fab 2 and in due course, Fab 3 without need for raising any capital. We are adding cash at an increasing rate and Fab 2, with this investment, is well within our capability. We want to make it then with respect to our cash flow. Operator Thank you. And the next question is going to come from Richard Shannon with Craig-Hallum Capital Group. Your line is open. Analyst (Richard Shannon) Well, hi, guys. Thanks for letting me ask you a couple of questions as well.

Jim, I would love to put the numbers you mentioned in your prepared remarks here to get to a fourth quarter revenue number. You mentioned a royalty number. I think you mentioned advanced products growth or total product growth. I am not sure which 1. That was coming up with revenues kind of in the $185 million range for the fourth quarter. Am I doing the math right? Analyst Or if not, can you correct me? James F. Schmidt I am not going to give you a specific question, but I do wanna make clear, Richard, that the number I quoted for 10% product revenue growth is total product revenue growth. Okay?

And what I said about advanced products, product revenue growth within advanced products, will be yet again another double digit increase. In that category of product. Patrizio Vinciarelli Well, let me give you more color with respect to So as we discussed earlier, the licensing side of the business has got lumpiness, potential for additional deals, We are taking the long term horizon. We are now in hurry. On get any deal done, as time goes on. The cost to hyperscalers and OEMs, for VPD license goes up, but they are pretty fast clip as we progress through the investigation at the ATC. But there could be deals done this quarter.

And for that reason, we really cannot give you a guidance, that we would be comfortable with. Given the level of uncertainty And for that reason, what we provided, with in terms of helping you set expectations. Is with respect to the product side, that which we can predictably expect to deliver, which is low double digit increase in product revenue, right, hardware revenue. separate and apart from licensing income, for which we provided a minimum of 43 million and that assumes no new deals are done within Q4. James F. Schmidt Richard, 1 other point to mention, the 43 million as we have said and Patrizio just said, does not rely on any new deals.

But inherent in the licensing agreement we have there is potential for incremental royalty revenue just as a function of the existing arrangement, and we cannot predict that exactly. Patrizio Vinciarelli that is right. So it could be the number that we are forecasting the minimum of 43 ends up large and that even without new deals. So it is a very conservative number. Analyst (Richard Shannon) it is it is a baseline, and that is what investors like to see. So I just wanna verify that. Thank you for that. My second question is related to licensing kind of the notion of run rate here. You mentioned kind of a $43 million run rate, again, nothing else gets done.

And let's start with that notion in mind here. You have mentioned that many. Most of the licenses you are you have done here in the past have been 2 year terms here, and I think the first 1 is coming up for renewal or will be expiring, in the not too distant future. And so I wanted to get a sense of your expectation of renewals of those so that we can, can, you know, assume a real recurring run rate that is gonna go for many quarters in a row. So if you could comment on that, that would be great, please. Patrizio Vinciarelli Yeah.

So I think it is becoming more and more apparent that you know, Vicor, pioneer role. With respect to high-density power system is multifaceted, right? As of as recently as a year ago or even within a shorter time frame, all the focus was on NPMs as part of IBA, so as a stepping stone to the point of load for competitive alternatives. Again, we do not use NBMs because of factorized power system. Does not require intermediate bus converter. But visually, of the competitive alternatives do. The focus clearly has recently shifted to BPD, which is on a different scale of significance. Right? Its significance in terms of enabling AI power systems is much greater than NBMs.

Because it is not the intermediate bus converter, but it is the point-of-load system, which is where the spotlight, where the focus should be. And so there is greater value associated with that. And we are capturing that value. We capture that value. With the first VPD license. We will be capturing that value with additional VPD licenses or inclusive licenses that involve the combination of NBMs, VPD, and other Vicor technology that over time is also going to become an issue for unscrupulous competitors to contend with Okay. Analyst (Richard Shannon) Great. Thanks for that detail. I will step out of line. Operator Thank you. Thank you. And the next question will come from John Dillon with DNB Capital.

Your line is open. Analyst (John Dillon) Hi, guys. Congratulations to the whole Vicor team. Incredible quarter. Philip, my question's, really for you. With the exception of Vicor, I have never heard of any company claiming that power supplies could enable higher performance processors. Yet Cerebras just announced a new CS-4 AI processor in Andrew Feldman, the senior VP of products stated that the wafer scale engine stayed the same as the CS-3. So the CS-3 had the same memory and logic, but there are 2x, the increase in speed, And with 3 of these together, they had 10 x the throughput of 3 wafers.

And he attributed a big part of the increase was their ability to deliver higher density power to the to the same wafer. So, Philip, I find this extraordinary. Can you walk us through that and let us know what the reactions are from your new target customers now that you are demonstrating the benefits of the second gen VPD? Patrizio Vinciarelli So, John, we are not going to make any comments that are specific to any customer. Right? I am going to answer your question in general terms. With specificity. Every generation of AI processor is stepping up its current requirements. By a dramatic percentage increase.

What used to be very high current requirements not that long ago of a few 100 amps. Right, following the era of Intel processors that were barely consuming 100 amps. it is now at the thousand amp level and on its way to thousands of amps. And then there are leading edge applications such as wafer-scale engines, where you are dealing with tens of thousands of amperes, going to a 100 thousand amperes. that is where the action is. that is where you know, inference and other eye enabling capabilities get realized. And the fundamental, if you will buy current, The fuel by current at ever decreasing voltages.

Which makes factorized power with current multiplication the technology of choice, And conversely, for elementary handicaps, the competitive approach were the upper voltage is in effect averaged down by mixing a low voltage source, is 1 that is inefficient in terms of its positive. Power distribution, with ground, which is fundamentally zero volts. That kind of technology is a real handicap with respect to keeping up with AI demands. Conversely, our technology was envisioned a long time ago and we kept on improving it. Right? We got lots of new developments related to factorized power, ChiPs, components, And these are reflected in the level of performance that we are bringing out with every new generation. Right?

The initial demonstrations we are able to show for second gen VPD reached 3 amps per square millimeter. We are not that far away from 5, 6 amp per square millimeter capability. Philip D. Davies We are going from what used to be in a time frame where we are powering a GPU many, many years ago. With current multipliers to the level of 50 and a half millimeters. We are now 1.5 millimeter. 6 months, we are going to be at 1 millimeter. So it is this kind of technology, the packaging technology, power conversion engines, control systems, unique components. That enables AI.

So, John, just to build on that, I think just to build on what Patrizio said, I think that was on display last week at Open Compute with our meetings with several big customers in terms of their level of excitement around our second generation VPD. They have been waiting a while to see it. We have been focused on our lead AI customer. But now we are we are here. We have got the demo system set up. They were excited by what we showed them. So I think it is now up to us to roll this forward and to bring these deals home. Patrizio Vinciarelli Within our capacity constraints. Yes. Our near term capacity constraints.

Analyst (John Dillon) Okay. Now before you have talked about pricing per watt, so at twice the power, with the fifth gen solutions, are average selling prices going up? Patrizio Vinciarelli Let's not get into that. I think what we can say is that our total competitive standing. Which obviously leads with performance but needs to deal with cost. Is becoming stronger and stronger. Because we have the right approach. To solving these point-of-load challenges And with the right approach, inherently, there are scalability and cost advantages that we will materialize as we scale up from a nearly full Fab 1 to Fab 2 and a Fab 3. We are going to have the economies of scale.

We believe we are on the right track, and that is the industry is foolishly going down a dead end road. Excellent. Analyst (John Dillon) And the IVR customers you last time, how's that progressing? And that will be my last question. Philip D. Davies So, again, as we talked about, John, IVRs, it is very early days. For IVRs in terms of really, delivering solutions to customers. They are intrigued. By, you know, using IVRs on some of the rails. I think for the high current rails, we have the best solution. So it might be all Vicor. It might be some Vicor and some IVRs. We do not know yet. We will see how that plays out.

But IVRs have a way to go yet in terms of proving their performance, sort of claims. Patrizio Vinciarelli So we had several meetings last week on the IVR front with you know, 2 of the other companies at an hyperscale interested in solutions, IVR solutions, using 1 of these 2 companies. And so we are told by the Everscaler that when it comes to feeding the IVRs at 1.8 volt, we would be the only solution. I think it remains to be seen. The jury is still out. With respect to how soon these IVRs will become a practical reality. Good news is that this hyperscalers saw that we have a solution that does not involve IVRs.

So fundamentally, they can come to us for either alternative, 1 that involves IVRs with that which IVRs provide, which is, you know, to be honest and fair, They provide flexibility, at least now in theory. But in reality, they will over time. Provide flexibility. But that flexibility comes at a significant cost. Whenever you send them you deal with the real numbers, not the marketing numbers, the insertion cost to, in effect, process power through an IVR stage is close to it is upwards of 10%, and it could be pretty close to 15%.

And for that 10, 15% of extra power dissipation, all that you are getting all that the customer is getting, is a current gain of 2.5. Now it does provide flexibility but from a power system efficiency perspective, it is a very charged proposition. We are open minded, though. We are perfectly willing, eager to play a support role with respect to an IVR application.

And for me to tell you the same point-of-load technology enables us to deliver thousands of amps at 0.5 volts with the accuracy, current bandwidth, and all the right attributes, that same technology can deliver 1.5 volt to an IVR and if customers, for whatever combination of reasons, want to go down that path, we will be there to support Excellent. Analyst (John Dillon) Thank you very much. Operator Thank you. And our next question will come from Richard Shannon with Craig-Hallum Capital Group. Your line is open. Analyst (Richard Shannon) Oh, great. Thanks for letting me ask a follow on here.

In the press release and in the call here today, you have used a couple of terms that I am unfamiliar with. You know, stage 2 and stage 3 licenses. If you could explain those, that would be a big help here. Patrizio Vinciarelli Yes. I would be happy to. Actually, if you go if you go to our website, we now have a licensing page. And, on that licensing page, you can get an answer to the question. And it is a quantitative answer to the question. As it relates to royalty rates, which change as a function of the stage.

So fundamentally, for any Vicor patent in our portfolio, that has not been asserted a prospective licensee can take a license at stage zero. that is the most cost effective license. It is most cost effective because Vicor has not had to get into deals with law firms. To assert that patent and go through, in effect, the enforcement effort. But if the patents are being infringed, and we have to assert them to accept that there is a cost to doing that as time progresses and the enforcement effort, advances, we increase the royalty rate in relationship to what we call stage x. So after stage zero comes stage 1, 3.

So 3 begins when the ITC institutes an investigation And the first roughly 10 months of that time frame which is during all the phases of the ITC process before a hearing, we have increments in the royalty rate But as you can see from the website page, they elevate by 5% per month As we get into the hearing and then, the initial determination, by the administrative law judge at the ITC the final determination exclusion order, and enforcement of the exclusion order by Customs and Border Patrol the cost to an, in effect, late licensee that, in effect, is taking a wait and see attitude or has approached this from the perspective of taking chances, it keeps escalating because our cost has gone up.

And, with that, we deserve to fetch more with respect to the patent and its value. So all of this is intended to encourage early adoption. Encourage licensee not to take their chances, not to roll the dice, We got a track record of knowing what we are doing. And we are going to keep doing that. And we are very determined that we are very well equipped. With partners that have a vested interest in the right outcome which is not the case for our opponents. So, that is how the various stages of this process, relate to time And the cost of the license. So it is royalty rate.

And if you look at the web page, there are curves that define this progression. Analyst (Richard Shannon) And part of the reason for this is to have a level playing field, right? it is very important that we treat each and every licensee fairly. All of these licenses have got most favorable, the licensee provisions, which means that you can grant to a following licensee a license on better terms than a than a prior licensee under similar conditions. Well, similar conditions among other things means at what stage the prior licensee took a license as compared to a new licensee.

So we have documented our practice among other things, to ensure that we have a complete transparency and fairness and consistency in our methodology. K. Thanks for that detail here. And I see the web page here very comprehensive and complete. So thank you for that. My follow on question is regarding the AI OEM that you signed the license with in the third quarter. The 2 part question. The first 1 is, why was that seemingly mostly a nonrecurring or onetime license versus something that might be ongoing? And second of all, can you state which stage this third quarter AI OEM was licensed at? Patrizio Vinciarelli So we say that this is not recurring to the contract.

May be, you know, the source of pressure of confusion. Was my comment to the fact that which has been characterized now several times has nonrecurring keeps recurring. So by definition, it is not nonrecurring. But beyond that, what we recorded in Q3 from this first pure VPD license is far from non-recurring whichever way you wanna look at that word, In fact, there was at the beginning of Q4, another significant license PO that came from the same new licensee. So these licensees are structured whether they are all inclusive, or per unit, to be in effect proportionate to the use of the technology by the licensee.

And, obviously, as time goes on, licensees make greater use they pay royalties in direct proportion to that. You know, we have, different ways of making this happen. For me, there are 2 approaches either on a per unit basis or by estimating what the use by the licensee is going to be over a couple of years. And, having a new. The all inclusive license that deals with that time frame, before we take on the next couple of years. James F. Schmidt Richard, just to amplify what Patrizio said, it is better to think about the royalty revenue as recurring.

Okay? it is a licensing practice that is now up and running. it is generating royalty revenue. it is proportional to the use of what otherwise would have been infringing. Technology. So it is very important everybody understand that we have used couple of quarters of catch up, but really think about this as recurring revenue now. Patrizio Vinciarelli it is in the P&L. Keep on coming. Increasing levels. So I think it was perfectly appropriate say, couple of years ago. To look at a lump sum contribution in 1 quarter as non recurring. Back then, there was obviously the conservative way to think about it.

But now, to Jim's point, obviously, there is been a lot of recurrences of non recurrent things. And they are no longer non recurrent. Operator Thank you. And our next question will come from Justin Clare with ROTH Capital Partners. Analyst (Justin Clare) Hey, thanks for taking the follow-up here. I just wanted to follow-up on the capacity expansion here. Particularly for Fab 3. Wondering how we should interpret the land acquisition that you made for Fab 3 at this point.

Is that a commitment to add additional capacity Or is that or should we view that more as an option to potentially accommodate longer term growth And then just trying to think through how long it might take for you to get to fully utilizing 5 x the, the capacity that you have with Fab 1? Patrizio Vinciarelli So we bought land. We closed a week ago or thereabouts. So. But we are not going to act on it in terms of putting up the building there for now.

The logic of having that flexibility was in effect to make the most out of the process that we went through earlier this year in investigating these various options that carry different trade offs. Right? So on a new campus, we have total flexibility with respect to the complement of buildings, how they relate to each other, in terms of next fabs. This very valuable in terms of medium, longer term planning. as distinct from the need to act in the very short term, with respect to expanding capacity within an existing building.

So we now have the wherewithal, to take very short term steps with time scale of 5-6 months on the 1 hand within existing infrastructure, including 330 thousand square foot building, as well as doing it from the ground up in a different site. We are going to act first on the Fab 2, which is in Merrimack. To the west of Andover, And it is yet to be determined when we will want to pull a trigger on Fab 3. Again, Philip and I yesterday were having a call with the CEO of a major customer. They are wanting to, you know, reserve capacity over the next few years.

These kinds of discussions are going to facilitate decisions with respect to when to pull the trigger on the next incremental capacity. Philip D. Davies And it might be worth mentioning the call they had was not with an AI customer. Yeah. Analyst (Justin Clare) Okay. Interesting. Thanks. And then just 1 other follow-up. You mentioned that you plan to. I think, start adding equipment in Q2 for fab 2. And so just wondering, do you anticipate running at near full capacity for Fab 1 next year? And that kinda justifies the ramp up of fab 2 into next year? Patrizio Vinciarelli Yes. Yeah. So unfortunately, for the near term, we have certain capacity limitations. Right?

And they are to be clear, dependent on specific platforms. Related to particular process steps, You know, if they are such that we can grow revenues, As Jim pointed out earlier, we expect low double digits increase in product revenues this quarter. But as we have been explaining over the last several calls we are getting closer to getting to full capacity utilization of Fab 1. Hence, the need to step with some of the process steps into Fab 2 starting Q2 of next year. Analyst (Justin Clare) Got it. Okay. Analyst Thank you. Operator Thank you. And this is all the time that we do have for questions today. So this will conclude today's conference call.

And thank you for participating and you may now disconnect.