Vicor sees 18.5% year-over-year revenue growth in Q3 2025, driven by strong licensing performance and advances in second-generation VPD technology.

OPERATOR - (00:01:10)

Good day everyone and welcome to Vicor third quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note that this conference is being recorded now. It's my pleasure to turn the call over to the Chief Financial Officer, Jim Smith. Please proceed.

Jim Schmidt - Chief Financial Officer - (00:01:47)

Thank you. Good afternoon and welcome to VICOR Corporation's earnings call for the third quarter ended September 30, 2025. I'm Jim Schmidt, Chief Financial Officer and I am in Andover with Patrizio Vinciarelli, Chief Executive Officer and Phil Davies, Corporate Vice President, Global Sales and Marketing. After the markets closed today, we issued a press release summarizing our financial results for the three and nine months ended September 30th. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. we also filed a Form 8K today related to the issuance of this press release. I remind listeners this conference call is being recorded and as the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, and our capacity expansion, as well as management's expectations for sales growth, spending and profitability are forward looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward looking statement will in fact prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2024 Form 10K, 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, Oct. 21, 2025. Vicor undertakes no obligation to update any statements, including forward looking statements made during this call and you should not rely upon any such statements after the conclusion of this call. The webcast replay of today's call will be available shortly on the Investor Relations page of our website. I'll now turn to a review of our Q3 financial performance, after which Phil will review recent market developments and Patrizio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P and L and balance sheet items and refer you to our press release or upcoming Form 10Q 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 2Q25, total of $141 million which benefited from a $45 million patent litigation settlement and up 18.5% from the third quarter of 2024. Total of $93.2 million. Advanced products revenue increased 8.2% sequentially to $65.5 million, and brick products revenue increased 26.6% sequentially to $44.9 million. Shipments to stocking distributors increased 49% 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 product share of total revenue decreased to 59.3% compared to 63.1% for the second quarter of 2025, with brick product share correspondingly increasing to 40.7% of total revenue. Turning to Q3 gross margin, we recorded a consolidated gross Profit margin of 57.5%, a 780 basis point decrease from the prior quarter, primarily due to the benefit of the $45 million patent litigation settlement in the second quarter. Q3 gross margin increased 840 basis points from the same quarter last year. I'll now turn to Q3 operating expenses. Total operating expense decreased 8.9% sequentially from the second quarter of 2025 to $42.6 million. The sequential decrease was primarily due to a decrease 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 the amounts of total equity based Compensation expense for Q3 included in Cost of Goods SGA and R&D was $1,024,000, $2,117,000 and $1,221,000 respectively, totaling approximately $4.4 million. Turning to income taxes, we recorded a tax benefit for Q3 of approximately $5 million, representing an effective tax rate for the quarter of negative 21.4%. The company's tax provision and effective tax rate for the quarter ended September 30, 2025 was positively impacted by the One Big Beautiful Bill acted during the quarter which resulted in the beneficial immediate expensing of domestic research and development investment. Net income for Q3 totaled $28.3 million. GAAP diluted income per share was $0.63 based on a fully diluted share count of 44,930,000 shares reduced by share repurchases within the quarter. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $362.4 million of Q3, an increase of $23.8 million sequentially and net of approximately $15.6 million in share repurchases during the quarter. Accounts receivable net of reserves total $53.3 million at quarter end. DSOs for trade receivables at 38 days inventories net of reserves decreased 3.3% sequentially to $92.3 million. Annualized inventory turns were 1.9. Operating cash flow totaled $38.5 million per quarter. Capital expenditures for Q3 totaled $4 million. We entered the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $8.3 million and with approximately $2.4 million remaining to be spent. I'll now address bookings and backlog Q3 book to Bill came in at 0.98 and 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 a 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 is will be used in most AI applications necessitating additional licenses, renewal of existing licenses or expansion of their school. At the core of our IP licensing business we have a power module business that leverages our investment in the first chip foundry based here in Andover. The challenge of bringing this FAB with its unique patented processes online is now behind us with yields and cycle times. At world class levels. While FAB utilization remains low as reflected in low product margins due to under absorption, we expect that performance levels achieved by 5th generation chips and 2nd generation VPD will soon bring about substantial capacity utilization. As we said on last quarter's earnings call, 2025 is a year of uncertainty and opportunity as of today, the quarterly and annual outcome in terms of top line and bottom line point 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. Phil will now provide an overview of recent developments and then Patrizio, Phil and I will take your questions. I ask that you limit yourselves to one question and a related follow up 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.

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:11:16)

Phil thank you, Jim. My remarks this quarter are focused on data center and AI power system requirements and the market opportunity for Vicor's chips and second generation vertical power delivery. To support advances in AI capable data centers and specialized AI factories, power delivery networks need to supply hundreds of kilowatts per rack and thousands of amperes for every gpu, TPU and network 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 tokens 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 RACs in a 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 1 volt, they. Are relying on VRs and IVRS requiring an intermediate bus voltage as low as 1.8 volts. Unlike 800 volts, power distribution at 1.8 volts is inefficient and requires low output voltage bus converters that are also inefficient. Raising the intermediate bus voltage improve bus converter and power distribution efficiency, but it would do so at the expense of VR or IVR efficiency and current density. In other words, VRs and IVRs suffer from an inherent tension between conflicting requirements. It is a game of picking your. Poison without achieving adequate performance. Not surprisingly, VRs and IVRs are current density limited to 1.5amps per square millimeter, while GPU and TPU roadmaps call for current densities above 3amps 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. Enter Vico's second generation VPD enabled by Vico'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 5amperes 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 Vico'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 Vico'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 - (00:16:13)

Thank you so much. And as a reminder to ask a question, simply press star11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Please stand by while we compile the list. Q&A roster. And our first question comes from the line of Quinn Bolton with Needham and company. Please proceed.

Quinn Bolton - Equity Analyst - (00:16:50)

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

Patrizio Vinciarelli - Chief Executive Officer - (00:17:45)

So to your point, we were 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's 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, our licensing income is going up substantially. As Jim reported in his preparing marks, we expect license income to grow at a 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.

Quinn Bolton - Equity Analyst - (00:19:23)

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

Patrizio Vinciarelli - Chief Executive Officer - (00:20:06)

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 I would submit should no longer be viewed as just a power model mega, but should be viewed in terms of assessing its value as the combination of two businesses. A 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 modular business supported by $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 Phil reported in his prepared remarks, fits a need, fills a void that is very much a subject of concern or limitation in the AR world.

Quinn Bolton - Equity Analyst - (00:22:07)

Excellent. I'll get back in queue. Thank you.

Patrizio Vinciarelli - Chief Executive Officer - (00:22:10)

Thank you.

OPERATOR - (00:22:12)

Thank you. Our next question is from John Tangontang with CJS Securities. Please proceed.

John Tangontang - Equity Analyst - (00:22:19)

Hi, good afternoon and thank you for taking my questions and congrats on the strength in the IP and licensing business. I was wondering if you could talk

Patrizio Vinciarelli - Chief Executive Officer - (00:22:26)

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 was there other licensees that you signed up and other royalty streams relates to that? So I guess as we look back at what has come about this year on the eve of the final from the International Trade Commission, our first ITC case which as you know resulted in exclusion order. Prior to that we signed up a substantial hyperscaler. So that was in January. We then settled a dispute with one of the respondents in the ITC case. So that came into a second quarter performance. In the third quarter we as I mentioned earlier, entered into a second license with an existing licensee who already held a first license. So that's been the progression. Okay, great, thank you, that's helpful. And then I was wondering if you could talk just about bookings for the next quarter and couple quarters. You had a nice step up in the book to bill just backing into it. Is that just the catch up from the tariff headwind that you faced or is there more organic demand there underlying that? Well, so depending on end markets there. Is.

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:24:06)

A different level of activity. Phil 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 fifth generation components and second generation vertical power delivery. So as suggested in Jim's earlier remarks, we expect to feel the fabric as we do that and no longer suffer from significant under absorption having in effect put a lot of capacity in place in anticipation of demand. We're going to see all these parameters grow substantially starting with bookings, backlog and the top line from.

John Tangontang - Equity Analyst - (00:25:17)

Yeah, John, 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, you know, strengthening as we go through the year and that's what happened in Q3.

OPERATOR - (00:25:33)

Got it, that's helpful, thank you. And I'll jump back in queue.

Risha Shannon - Equity Analyst - (00:25:37)

Thank you. Our next question comes from Risha Shannon with Craig Hallam Capital Group. Please proceed. Hi guys, thanks for taking a couple of my questions as well. Address kind of a two part question here on the IP revenues. First of all, I'd love to get.

Patrizio Vinciarelli - Chief Executive Officer - (00:25:56)

A sense here of how many customers do you have licensed now, and I certainly understanding that one of them has two different licenses, how many that you might expect here over the next couple of years or so. And then last call, you talked about the potential, actually I think you talked about this in the shareholders meeting as well, but the potential of seeing as much as $400 million worth of return on litigation investment through the end of 26. You didn't use that language today, although previous answer from Petruzzio suggested that's the case. We just want to confirm that that's possible. 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 Lego one, our first ITC action has been growing and we've been able to raise a 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 contract manufacturers that were respondents in those decades, it will affect for the foreseeable future any other OEM and hyperscalerr that is dependent on on those infringing products. Let me go to the other part of your question with respect to how many licensees that we signed up and how many do we expect to sign up? 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 in their center space. We know that's not going to be easy, but given our visibility with respect to the power roadmaps, the existing solutions, the coverage of our comprehensive band portfolio over various aspects of bus conversion, density bus conversion over a wide range of voltages, all the way to the point of law. With respect to first generation of epd, which Blacker invented but chose not to practice because of its limitations, I don't see any hyperscaler or OEM with in effect state of the art solution being able to do without power system ip, we have very well thought out and obviously it's been very effective strategy to assert ip, protect our innovations and get compensated for it. And I see that continue to expand and involving the entire marketplace of OEMs and hyperscalers.

Richard - (00:29:55)

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-generation 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, applications that you're working with and how long you expect the qualification process to last. Thank you.

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:30:25)

Hi Richard, it's Phil, so I'll take that one. So we have been very, very laser focused on our lead customer right as we brought the technology through and now we're very close Q1 of next year to production. So we have been talking to pretty much everybody in the industry. But what we've done now in terms of the second phase of our VPD launch is to really focus in on two or three companies, Hyperscaler and a couple of OEMs that offer major, major growth. They have huge potentials because of their scale in terms of both the 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 VPD solutions, infringing VPD solutions albeit, but they have not been able to meet the specifications that they've put forward to the competitors, so called competitors of Vicor. So they're very, very excited. Now that we're ready to engage and Q4 we'll see that happen in earnest and in terms of when I believe we will get to market in terms of sort of pre production it's probably the second half of next year and towards the end of Q3 going into Q4.

Richard - (00:31:57)

Great, thank you guys.

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:31:59)

Thank you.

OPERATOR - (00:32:01)

Our next question is from John Dillon with DMB Capital. Please proceed.

John Dillon - Equity Analyst - (00:32:08)

Hi guys, Congratulations. It's really good news all around. Phil, I've got a follow up question to Richards 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?

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:32:24)

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 search goal of 133% but thus far we've met the goal of the original current requirement. 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. All right, so we're so far ahead even of the competition that they're looking at Vico because it's not just current density. I mentioned the thinness of the package. They're also telling us they need solutions below 3 millimeters in height and no one is able to do that. They're all at about 5 millimeters, so that's a critical spec as well. We hit that 50% smaller than what they want. So 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 - Chief Executive Officer - (00:33:50)

Let me add a comment to that regarding thickness. Right, so VR solutions with gearboxes and so on and so forth are quite thick, several millimeters, quite clumsy, thermally inept as opposed to that. Very difficult to thermally manage, very costly, not inherently reliable. There are IVRs which are thinner and are capable of up to about 1.5amps 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 volt, which at high power levels implies huge currents. The need to get delivered at such a low voltage, very close to the point of load. And that was one of the points that Phil in his prepared remarks made. So the predicament for any customer seeking a VPD solution and looking at conventional approaches ranging from traditional VRs to IVRs, which is in a way a. Renewed. Attempt at that which intel did with FIVR 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 5 or 6 volts, so power delivery to a VR is not quite as challenging as 1.8 volt. But then the VRs are thicker in terms of solution. They must run at a much lower frequency. They're poor duty cycle. So that feels 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 an averaging principle, is dividing a voltage by fundamentally mixing that voltage source with ground. And as you raise the level of the source, as the output 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 don't have current gain and they insert a loss in the case of IVRs, which is upwards 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. I think it's been noted that the typical house power inlet is 150amps. Obviously it's a much higher voltage and that you can power whole house. But the challenges of distributing a ,thousand amp at 1.8 volts are a significant handicap with respect to IVR. So they all have the 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 - Equity Analyst - (00:38:15)

Yeah, I get that because of Ohm's Law, the lower voltage is really going to be a handicap for them and they're going to have incredible transmission losses and extra heat that they've got to remove. So I get that.

Patrizio Vinciarelli - Chief Executive Officer - (00:38:26)

That's good.

John Dillon - Equity Analyst - (00:38:27)

That's a great explanation.

Patrizio Vinciarelli - Chief Executive Officer - (00:38:29)

It's not just Ohms law, it's Kirchhoff's laws. There's a few laws at play, but the bottom line is they're up against the laws of physics which are not changing.

John Dillon - Equity Analyst - (00:38:39)

Right.

Patrizio Vinciarelli - Chief Executive Officer - (00:38:41)

Italy, 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 - Equity Analyst - (00:39:01)

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

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:39:16)

I think we're talking about different. Sorry, John. Yeah, only customer is Q1. John and I now was talking about other customers next year in the second half, end of Q3, Q4 for other customers for production.

John Dillon - Equity Analyst - (00:39:33)

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

Patrizio Vinciarelli - Chief Executive Officer - (00:39:43)

Okay, well, so the problem metrics with respect to current multipliers at higher or lower current levels is extremely scalable. We're going to have complete 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 IV architecture that's handicapping solutions. You know, I can tell you that even though subsequent generations of GPU. Have.

Phil Davies - Corporate Vice President, Global Sales and Marketing - (00:40:44)

Used micro technology, at least for bus conversion, now then, as in terms of its power system deliver the requisite you know, power card level that the Citigron team had nuggeted. And this is a compromise that is, you know, very challenging, clearly, particularly as the AI space gets, you know, more competitive with obviously some increase in credible threats of competitive alternatives. 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 you're in full control with short cycle times. Right. So there's a lot of other things going into that that are advantageous for us getting to production in Q1 next year.

John Dillon - Equity Analyst - (00:41:44)

Congratulations. This is great news. Great job, guys.

Jim Schmidt - Chief Financial Officer - (00:41:48)

Thanks. I'd just like to add to what Phil 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 years ago. So we have an internalized fab, we have very, very short cycle times, we have great yield, fantastic inventory control, quality control, and on time delivery. All the metrics that you care about operationally are really now in a place that we're very, very happy about. It's a big deal for Vicor. And I think that what 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, we're absorbing under absorption variances. So that's a future state for us to all be very optimistic about.

John Dillon - Equity Analyst - (00:42:42)

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

OPERATOR - (00:42:49)

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

Patrick Connors - Equity Analyst - (00:42:57)

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 or even having pushback from your current clients or future clients about.

Patrizio Vinciarelli - Chief Executive Officer - (00:43:24)

Not having a second source and how are you addressing that? So that's always been an issue and will remain an issue. We have ways to deal with that. Obviously a licensing practice provides opportunity for Multi sourcing, 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 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 needs. We understand given the pace of growth in AI that there is a need for multi sourcing. 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 - Equity Analyst - (00:45:25)

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? Would that satisfy your lead customer?

Patrizio Vinciarelli - Chief Executive Officer - (00:45:40)

Oh yeah, that's a very good yield in this industry. It's a record yield for us. It's great yield. To be clear, that's for particular module that we make upwards of 100,000amonth. So that would not be applicable to devices that are not in mass production. Okay, thank you guys.

Patrick Connors - Equity Analyst - (00:46:07)

Congratulations. Thank you.

OPERATOR - (00:46:11)

Thank you. Our next question comes from the line of Queen Bolton with Needham and company. Please proceed.

Quinn Bolton - Equity Analyst - (00:46:20)

I just wanted to come back on the licensing or the royalty revenue today. 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? Not.

Patrizio Vinciarelli - Chief Executive Officer - (00:46:49)

It does not include vertical power. It only stems from the assertion of IP to a few certain patterns that we have to MBM technology. We have other patterns to MBMs, we have lots of patterns with respect to VP package. None of these have been asserted yet. Now as I mentioned earlier, the first lie or the first linear exclusion order with respect to those pallets 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 identified the Customs U.S. customs 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. In fact it this kind of developments that led us to the license that was entered into in the Third quarter. But all of the action have been revolving around the very first case. The very first case.

Quinn Bolton - Equity Analyst - (00:48:27)

So, short summary, you will have another opportunity to go back to customers to license the vertical power at the point you choose to assert those patents in the future.

Patrizio Vinciarelli - Chief Executive Officer - (00:48:44)

Absolutely. So the hyperscalers OEMs that we've been communicating with over time, in some cases for three years or more, they understand how a licensing practice works. The cost of a license in terms of royalty rates starts at a 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 no complaints filed, no litigation 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 cashmere if you can. Because if they play that game, I think we already demonstrated it will catch them. And that's going to be very, very expensive. Got it.

Quinn Bolton - Equity Analyst - (00:50:03)

And then a quick one for Jim. Jim, 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.

Jim Schmidt - Chief Financial Officer - (00:50:28)

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 is our expectation.

Quinn Bolton - Equity Analyst - (00:50:38)

Okay, thank you, Jim.

OPERATOR - (00:50:41)

Thank you. And as a reminder, ladies and gentlemen, if you do have a question, simply press star11 to get in the queue. And we have a question from the line of Mr. Neil Gore. Please proceed.

Neil Gore - Equity Analyst - (00:51:01)

Hello, great quarter guys on your licensing deals. Are they similar to most licensing deals where you get money up front, granting the license, then on an ongoing basis, you get a small percentage of the sales?

Patrizio Vinciarelli - Chief Executive Officer - (00:51:19)

We actually don't look for money up front, obviously. We have all cash and the cashier services 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 fraud. They don't even 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 - Equity Analyst - (00:51:57)

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 - Chief Executive Officer - (00:52:08)

So I think we have examples of both. So we have one example with an hyperscaler where the royalty rates increase at about 3% per month. We have another example where the royalty is fixed by quarter for a number of quarters. And this reflects in effect the fact that depending on the oem, the upper scale, 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 - Equity Analyst - (00:52:56)

Okay, and one last thing. About two years ago you said you're 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 going to achieve it? Yeah.

Patrizio Vinciarelli - Chief Executive Officer - (00:53:16)

So we are almost half of the way there. Right. This year is going to be quite good. You can extrapolate to the end of the year at this point, given the track record of the last three quarters. I think, as suggested in answer to questions going back to maybe about this time last year, when I think I stuck my neck out indicating that this was going to be a record year for Vigo, it's turning out, as Jim summarized earlier, to be a record year in all respects. Top line, bottom line, eps. But we are not quite half of the way there to 1 billion. So what's going to get us there? Well, filling the FAB by itself will get us just on product revenues past 1 billion because actually the capacity of that FAB has been going up, particularly with fifth generation products. Second generation VPD devices which being thinner, have faster cycle time and higher capacity per panel through the fab. So needless to say, if we were to fill, the FAB would be just on the product avenues beyond the licensing business as of snapshot in the third quarter is at a 90 million run rate. I can't tell you what's going to happen next quarter, the quarter after that. There could be additional licensing deals that may not yet happen, but I can tell you that there's going to be a lot more over the next couple of years as we get additional exclusion orders and the industry gets to realize that if products use Viagra IP they need to have a license, so those products aren't going to ship. So the licensing business by itself, as suggested earlier from 90 can get to a couple hundred million dollars. We have line of sight to that within a couple of years. And that's not the end of that growth opportunity. I think it can Go well beyond that level.

Neil Gore - Equity Analyst - (00:55:54)

Thank you very much.

OPERATOR - (00:55:57)

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

John Dillon - Equity Analyst - (00:56:05)

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 7,000amps. And you're saying that a lot of the power supply companies are having issues with 2000amps. So my question, is there anything on the horizon that can power a 6000amp processor besides Vicore?

Patrizio Vinciarelli - Chief Executive Officer - (00:56:34)

Well, I frankly believe that even at the 2000amp level, VRs and IVRs and bus converters delivering that kind of power, kilowatts either 5, 6 volt in the case of IVRs, 1.8 volt. 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 Phil summarized in his prepared remarks.

John Dillon - Equity Analyst - (00:57:28)

Right.

Patrizio Vinciarelli - Chief Executive Officer - (00:57:29)

It requires lots of layers, you know, hard to put together, hard to assemble on the back of processor, heat getting trapped, lots of issues even at the level of 1000amps, never mind 2000 or more. Now there is one large hyper scanner that has gone very far with respect to, 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.

John Dillon - Equity Analyst - (00:58:18)

Power.

Patrizio Vinciarelli - Chief Executive Officer - (00:58:18)

System capabilities that are readily available from multiple sources.

John Dillon - Equity Analyst - (00:58:25)

Sounds like there's nothing out there that will be able to handle 6,000amps.

Patrizio Vinciarelli - Chief Executive Officer - (00:58:31)

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 a word scale engine as opposed to. Yeah, so 6,000amps for web scale engine would be solving it right there. We're now at the level of 50,000amps and in the future it's going to be higher than that. So it's all relative, right? All these things. There's nothing, Terry Magic about 1,000 apps, 2,000 apps or 6,000 apps or 50,000 apps. 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 that is 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 process, which is fundamentally the predicament of IVRs.

John Dillon - Equity Analyst - (01:00:08)

Yeah, and that's my point. It sounds like Vicor is the only one who's going to be able to handle these new processors that are going to be running these kind of.

Patrizio Vinciarelli - Chief Executive Officer - (01:00:17)

I'm not good enough to know. It's always dangerous to make absolute statements. Right, I understand.

John Dillon - Equity Analyst - (01:00:24)

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

Patrizio Vinciarelli - Chief Executive Officer - (01:00:26)

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, pioneered that heavily patented, many, many different perspectives. And it just began to show the industry that anybody chasing our track is going to have serious problems. You might recall me saying in the past that a pine portfolio is landmine began to see the effect of people stepping over the perimeter of that landmine field.

John Dillon - Equity Analyst - (01:01:19)

I get it, I get it. And then, Phil, 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 going to start seeing an increase in MBM sales in the next quarter or two?

Phil Davies - Corporate Vice President, Global Sales and Marketing - (01:01:37)

Well, I think that, you know, the MBMs that we have are super for a lot of different applications. But the focus for us, John, is really, as Patricio pointed out, bus converters are useful in a number of applications. But the future isn't bus converters. We'll sell a lot of them going forward, but it's really about VPD and coming in 48 volts to our VPD 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 - Equity Analyst - (01:02:10)

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

Phil Davies - Corporate Vice President, Global Sales and Marketing - (01:02:18)

We're seeing that, yeah. We'll see some sales. Fine. That's nice, but it's not at the.

John Dillon - Equity Analyst - (01:02:24)

Core of the salad. Totally get it. Great job. Great job, guys.

OPERATOR - (01:02:28)

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