Vicor Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2026 Viacor Corporation 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. And to ask a question during the session, you would need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. And to withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jim Schmidt, Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to Vicor Corporation's earnings call for the second quarter ended June 30, 2026. I'm Jim Schmidt, Chief Financial Officer. and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer and Phil Davies, Corporate Vice President, Global Sales and Marketing. Earlier this morning, we issued a press release summarizing our financial results for the three and six months ended June 30, 2026. This press release has been posted on the investor relations page of our website, www.vicorpower.com. We also filed a form 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 risk and uncertainties. In light of these risk 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 2025 Form 10-K, which we filed with the SEC on March 2, 2026. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today. Tuesday, July 21, 2026. VICOR undertakes no obligation to update any statements, including forward-looking statements, made during this call, and you should not rely upon such statements after the conclusion of this call. A webcast replay of today's call will be available shortly on the Investor Relations page of our website. I'll now turn to review of our Q2 financial performance. after which Phil will review recent market developments and Patrizio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&O and balance sheet items and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, VICOR recorded product and royalty revenue for the second quarter of $143.4 million. up 26.9% sequentially from the first quarter of 2026 total of $113 million and up 1.6% from the second quarter of 2025 total of $141 million which included a $45 million patent litigation settlement. Advanced product revenue increased 45% sequentially to $94.2 million and BRIC products revenue increased 2.4% sequentially to $49.2 million. Schmidt's stocking distributors increased 4.2% sequentially and increased 38.8% year over year. Exports for the second quarter decreased sequentially as a percentage of total revenue to approximately 46% from the prior quarter's 48.9%. For Q2, advanced products share of total revenue increased to 65.7% compared to 57.5% for the first quarter of 2026, with BRIC product share correspondingly decreasing to 34.3% of total revenue. Royalty income from our most recent license agreement, which provides for four $5 million quarterly payments in its first year and $10 million quarterly payments in its second year, contributed $15 million to Q2 revenue. In view of its accounting treatment, this license agreement is expected to contribute $5 million in Q3 and $10 million per quarter for the following four quarters. Turning to gross margin, we recorded a consolidated gross profit margin of 58%, a 280 basis point increase from the prior quarter, Q1 gross margin decreased 730 basis points from the same quarter last year, which included the previously mentioned $45 million patent litigation settlement. I'll now turn to Q2 operating expenses. Total operating expense increased 6.1% sequentially from the first quarter of 2026 to $48.2 million. A substantial increase in operating expenses was due to a substantial increase in contingent legal expenses paid out to the law firms partnering with FICOR for the license deal reached in Q2. The amounts of total equity-based compensation expense for Q2 included in cost of goods, SG&A, and R&D was $897,000, $2,085,000, and $1,198,000 respectively, totaling approximately $4.2 million. Turning to income taxes, We recorded a tax benefit for Q2 of approximately $10.9 million, representing an effective tax rate for the quarter of minus 27.9%. The company's tax provision and effective tax rate for the quarter ended June 30, 2026, was positively impacted by stock options exercised in the quarter. Net income for Q2 totaled $49.8 million. GAAP diluted income per share was $1.04, based on a fully diluted share count of 47,708,000 shares. Turning to our cash flow and balance sheet, cash and cash equivalents totaled $453.6 million at Q2, an increase of $49.4 million sequentially. And we're pleased to report that last Monday, July 13, We received a payment from the IRS relating to our application for CHIPS Act investment tax credit in the amount of $14.3 million as a refund from our 2023 tax return. This amount and other tax credit amounts we expect from subsequent tax returns will add to our cash balance in Q3 and beyond. Accounts receivable net of reserves totaled $78.9 million at quarter end with DSOs for trade receivables at 37 days. Inventory's net reserves increased 10.2% sequentially to $104.5 million. Annualized inventory turns were 2.1. Cash flow provided by operating activities totaled $34 million for the quarter. Capital expenditures for Q2 totaled $11.2 million. We ended the quarter with a construction and progress balance primarily for manufacturing equipment of approximately $18.2 million and with approximately $23.5 million remaining to be spent. I'll now address bookings and backlog. Due to book to bill came in above one and one year backlog increased 26% from the prior quarter, closing at $379.7 million. 2026 is the year in which Vicor's innovative products and technology licensing practice came into focus within the industry. As we bring on incremental capacity, we expect a nearly 10% increase in Q3 revenue and over $600 million in 2026 revenue. To achieve these growth objectives, we are planning for double-digit sequential increases in product revenue for advanced products. As we said last quarter, this guidance is based on conservative assumptions about our licensing practice. Specifically, the new licensing agreements may not result until our second ITC case gets to its final determination in 2027. Additional exclusion orders further restricting importation of infringing computing systems may provide motivation to close new licensing deals on favorable terms. Along with revenue growth, We expect margin expansion. Phil?

Thank you, Jim. At our recent annual shareholders meeting, I presented an update on our company's strategy and objectives. Our financial objectives of $2.5 billion in revenues at 70% gross margins supersede the $1 billion and 65% gross margin targets set in 2023, which we are on our way to achieving. Our updated objectives are based on a two-pronged strategy, leveraging synergy between our power module sales and IP licensing practice. As discussed at the ASM, our power module business is focused on a set of 100 customers across four markets and four regions globally. Within each of the four markets of HPC, industrial, automotive, and aerospace and defense, We have customers who are on the cutting edge of high growth applications with the most demanding requirements for power and current density with high efficiency and signal integrity. A perfect example of this is vertical power delivery. AI data center hyperscalers and OEMs need vertical power delivery to meet compute density requirements and AI data center performance. The market opportunity is growing rapidly and competitors are challenged to deliver on two key specifications, current gain and current density. With current gains greater than 40 and current density up to 5 amps per millimeter squared, VICO's second generation VPD is way ahead of all generation one competitive solutions. As discussed at the annual meeting, we will engage with selected customers with development systems and tools starting this quarter. Our objectives for our second generation VPD solutions over the next few quarters will be to expand our business opportunities with OEMs and hyperscalers wanting to be long term strategic partners. Major new product introductions are also underway in our industrial and aerospace and defense businesses, with market expansion now occurring outside of LEED top 100 customer opportunities that drove initial module development. As stated at our ASM a few weeks ago, we are very focused on the successful execution of our business strategy, which leverages our vertically integrated chip fab in Andover as the first of a multiplicity of foundries supporting our new financial targets of $2.5 billion in revenues with 70% gross margins and 40% operating income. With that, we'll take your questions.