Vicor Corporation

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 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 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 Schmidt. Please proceed.

Thank you. Good afternoon, and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2025. I'm Jim Schmidt, Chief Financial Officer, and I am in Andover with Patricio 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, but 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 is the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements, and our capacity expansion, as well as management's expectations for sales growth, spending, and profitability, are forward-looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risk and uncertainties we face are discussed in item 1A of our 2024 Form 10-K, which we filed with the SEC on March 3, 2025. This document is available via the EDGAR system on the SEC's website. Please note this information provided during this conference call is accurate only as of today, Tuesday, October 21, 2025. I-Corps 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 Patricio, Phil, and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, VICOR recorded product revenues and licensing income for the third quarter of $110.4 million, down 21.7% sequentially from the second quarter of 25 total of $141 million, which benefited from a $45 million patent litigation settlement, and up 18.5% in the third quarter of 2024, a total of $93.2 million. Advanced products revenue increased 8.2% sequentially to $65.5 million, and brick products revenue increased 26.6% sequentially to $44.9 million. Shipments to stocking distributors increased 39% sequentially and increased 46% year-over-year. Exports for the third quarter decreased sequentially as a percentage of total revenue to approximately 42.8% from the prior quarter's 51.9%. For Q3, advanced product share of total revenue decreased to 59.3%, compared to 63.1% for the second quarter of 2025, with BRICS 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 amounts of total equity-based compensation expense for Q3 included in cost of goods, SG&A, and R&D was $1,024,000, $2,117,000, and $1,221,000, respectively, totaling approximately $4.4 million. Turning to income taxes, we recorded a tax benefit for Q3 of approximately $5 million, representing an effective tax rate for the quarter of negative 21.4%. The company's tax provision and effective tax rate for the quarter ended September 30, 2025, was positively impacted by the one big beautiful bill act back during the quarter, which resulted in the beneficial immediate expensing of domestic research and development investment. That income for Q3 totaled $28.3 million. got diluted income per share with 63 cents, 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 at Q3, an increase of $23.8 million sequentially, and net of approximately $15.6 million in share purchases during the quarter. Accounts receivable, net of reserves, totaled $53.3 million at quarter end, but we have those for trade receivables at 38 days. Inventories, net of reserves, decreased 3.3% sequentially to $92.3 million. Annualized inventory returns 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 and progress balance primarily for manufacturing equipment of approximately $8.3 million, and with approximately $2.4 million remaining to be spent. I'll now address bookings and backlog. Q3 book to build 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, more 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 underabsorption, we expect that performance levels achieved by fifth-generation chips and second-generation VPD will soon bring about substantial capacity utilization. As we said on last quarter's earnings call, 2025 is a year of uncertainty and opportunity. As of today, the quarterly and annual outcome in terms of top line and bottom line, 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 provide an overview of recent market developments, and then Patricio, 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. Bill?

Thank you, Jim. My remarks this quarter are focused on data center and AI power system requirements and the market opportunity for Vicos 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 racks, the data center, or AI factory, they are raising power distribution voltages to 800 volts. However, to power the processor's socket at a core voltage below 1 volts, 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 improved 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 1.5 amps per square millimeter, while GPU and TPU roadmaps call for current densities above 3 amps per square millimeter. Because of low current density, first generation vertical power delivery using VRs necessitates complex stacked assemblies whose mechanical and thermal challenges are compounded by bus converters having to feed kilowatts of power at a low, inefficient bus voltage. 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 5 amperes per square millimeter peak current density. Thanks to this high current density, VICO'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 WICO'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.