Vicor Corp 2026 Q3 Earnings Call

Good morning and welcome to Vicor Corporation's earnings call for the third quarter ended September 30, 2026. I am 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. Earlier this morning, we issued a press release summarizing our financial results for the three and nine months ended September 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 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 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 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, October 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 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 will 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&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 $197.1 million, up 37.5% sequentially from the second quarter of 2026 total of $143.4 million, and up 78.5% from the third quarter of 2025 total of $110.4 million. Advanced products revenue, which includes royalty revenue, increased 47.5% sequentially to $138.9 million, and Brick Products revenue increased 18.4% sequentially to $58.3 million. Royalty revenue increased 119.1% sequentially 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 and royalty revenues will be less lumpy. Shipments to stocking distributors increased 24.8% sequentially and increased 16.2% year-over-year. Exports for the second 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 29.6% of total revenue. Turning to Q3 gross margin, we recorded a consolidated gross profit margin of 68.3%, a 1,030 basis point increase from the prior quarter. Q3 gross margin increased 1,080 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'll now turn to Q3 operating expenses. Total operating expense 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 $1,203,000, $2,655,000, and $1,483,000, 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 47,609,000 shares. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $513.1 million at Q3, an increase of $59.6 million sequentially. Accounts receivable net of reserves totaled $102.5 million at quarter end, with DSOs for trade receivables at 34 days. Inventories net of reserves increased 6.2% sequentially to $110.9 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, and with approximately $48.6 million remaining to be spent. I will now address bookings and backlog. Q3 book-to-bill came in above one, and one-year backlog increased 7% from the prior quarter, closing at $406 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.

Phil? 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 two weeks of Q4, which included a large order for second generation VPD modules from our lead customer.

The purchase of two 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 second generation VPD with its distinct manufacturability and performance advantages.

Open Compute this year focused on 800 volt DC rack distribution through inefficient intermediate bus voltages from 12 volts to six 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 second generation VPD, providing high current density and much higher current gain. With its transient performance eliminating voltage undershoots, Vicor proprietary ALL-FPA enables a 10%-15% reduction in AI processor power loss, with over 40 times the current gain of IVRs and three times the current density of VRs. Demo systems for second generation VPD and ALL-FPA have been set up in our Silicon Valley applications laboratory and are available for 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 two 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 100 customers and top channel accounts, or TCAs, with our global distribution partners across our four markets and four 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. 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 non-traditional companies that have entered the A&D market with new autonomous technologies. Successful execution is achieved with focus, and we are very focused.