Vicor Corporation (VICR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2026 Vicor Corporation Earnings Conference Call. [Operator Instructions] 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 and over 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 3 and 6 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 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 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 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 a 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&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 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 Products revenue increased 45% sequentially to $94.2 million and Brick Products revenue increased 2.4% sequentially to $49.2 million. Shipments destocking 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 Brick Products share correspondingly decreasing to 34.3% of total revenue. Royalty income from our most recent license agreement, which provides for $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 4 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 Vicor 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 and $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 ChiP 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. Inventories net of reserves increased 10.2% sequentially to $104.5 million. Annualized inventory turns were [ $2.1 million ], 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. Q2 book-to-bill came in above 1, and 1 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, superseded 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, Vicor's second-generation VPD is way ahead of all Generation 1 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 lead 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 and [ handover ] 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.

[Operator Instructions] and our first question is going to come from Quinn Bolton with Needham & Company.

Congratulations on the nice results and outlook. I guess I wanted to start with the second-gen VPD and just maybe an update on how you're progressing with the lead customer, but also Phil mentioned starting to more broadly sample second-gen VPD to a broader customer base. Do you still feel like you're on track to secure or ramp designs with either hyperscaler or other OEM customers for second-gen VPD over, say, the next 12 to 18 months?

Yes. So we've completed development with respect to a baseline of 3 amps per square millimeter current density with the initial chipset for our lead customer. We are now completing demo systems, including a dedicated VPD demo system to showcase with other customers. And we're on our way to raise the bar as far as per square millimeter late this year, beginning of next year. So I'm delighted with the progress we made within the last several months in terms of reaching initial targets. And we have the road map to expand on that.

And beyond the lead customer Patrizio, would you expect design wins to sort of ramp maybe at this point, second half of '27 for vertical power delivery?

I'm not going to make commitments with respect to specific days. I will say that I was in the valley for this is just last week, but there is a good deal of interest in our capabilities. We've been approached by two companies wishing us to provide a building block that is critical to deployment of [ IVRs ]. We look at that as an incremental opportunity. The reality of these capabilities -- competitive capabilities that is as you look at the migration of [ IVRs ] from 12-volt to 6-volt to 1.8-volt inputs, is that they're barely capable of delivering the real world largely over 1 amp per square millimeter. That's the message we're getting consistently from people in the on. When you look at all the factors at play, term of deleting, other factors, the competitive capability is quite limited, barely above 1 amp per square millimeter. And the market need, particularly with respect to were for scale engines, other advanced [ HPC ] system is already above those levels and project it to become much higher in a matter of a few years. And frankly, the industry has no solution for these requirements.

Got it. And then, Patrizio, so just any updates on securing a site with or without building for your second chip fab?

So we have several options at this point. They made some offers. Now them was second up yet, but we have the investment of choice at this point. And we'll probably be making decisions in the last few weeks.

And the next question will come from Richard Shannon with Craig Hallum.

I guess the first one is, Jim, I'd love for you to repeat the numbers regarding royalties with -- I think it was a new license year, something those went by pretty quickly here. And if you could follow up with just kind of general expectations of how to think about royalties in the current quarter as you -- within the context of the guidance you just gave us of revenues up 10%, please?

Okay. I'm going to -- Richard, I'll reread that paragraph for everyone. So royalty income from our most recent license agreement, which provides for $4 million, $5 million quarterly payments in its first year and $10 million quarterly payments in its second year. So that's a total of $60 million, contributed $15 million in 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 4 quarters. So the revenue is different than the cash collections, Richard, because of the GAAP accounting treatment. The $15 million recognized in Q2 was a result of the termination clauses in the agreement. So we could account for $15 million of the deal in this quarter. And because of the accounting treatment, that will drop to $5 million of revenue recognition in Q3 and then back up to $10 million for the balance of the agreement per quarter.

Okay. I think that answered my question also about the implied guidance there. And maybe if you can -- maybe I'll just ask Patrizio following up on this on characterizing this customer here, OEM, hyperscaler, et cetera. and whether this has been a past customer as well, please?

I can't comment with respect to the identity of licensees. But I think what we have publicly disclosed, which I can reiterate here is that we have a multiplicity of OEM licensees we scale as of now.

Okay. Fair enough. And my follow-on question is partially based on what I see in the press release and then also true to, I think in your response to one of the past questions here about [ IVRs ], the statement here in the press release about feeding [ IVRs ] with the cereal suppliers an incremental opportunity for Vicor. Would love for you to help me understand that a little bit better here? It seems like you could interpret as an incremental opportunity or could be displacing a full second-gen VPD solution here. So I'd love for you to help us understand that a little bit better, please.

So our technology lends itself to supporting either alternative. Without question, a pure factorized power system is capable of considerably more current density several times more with considerably better efficiency. But that doesn't mean that all applications would go in that direction for a variety of reasons. One thing that [ IVRs ] do have to be fair, is that they have flexibility. So in applications with a large multiplicity of nodes, a highly fragmented seller nodes, there's something to be said for IVRs in that they do provide a great deal of flexibility, configurability, but that comes a significant expense in terms of insertion loss. 15%, maybe 10%, but then if you try to get it down to a 10% loss, they need to run a lower frequency and they still have transient [indiscernible] issues, which factorized power system no longer has. So we have a huge efficiency advantage relative to this competitive alternatives. But that doesn't mean we can't play a support role for those alternatives and capture significant business.

And the next question is going to come from Justin Clare with ROTH Capital.

So I wanted to touch on the guidance. So updated your 2026 guide to over $600 million here. It looks like the update is primarily related to the additional royalty payments that you had laid out. But wondering if there are any other notable changes relative to the initial guide related to shipment expectations or related demand. And then just on the new licensing agreement, I wondering if you could share just how that's structured. Is that only royalty payments that you're anticipating from that? Or could you also see greater demand from your fab as a result of that licensing agreement?

So the total revenue growth comes to your point from a combination of new licensing deals. The ones we closed down, specifically the one that was closed in the second quarter, and product revenue growth. The initial license agreement that was closed in Q2 does not, for the first couple of years, provide for a sourcing relationship, but that's understood to be part of the relationship going forward, in conjunction with our second-gen VPD capabilities. And that's going to be the natural of this relationships going forward. with OEMs and hyperscalers.

Got it. Great. And then just wanted to touch on the expansion underway at your first fab here. Just wondering if you could share an update on the progress, when you anticipate the expansion being completed, and then you had previously talked about being able to reach $1.5 billion in revenue after that -- or at least $1.5 billion in revenue could be supported by the expansion. But I think that's sensitive to product mix. So just wondering if you could also share just how product mix might affect whether or not you could deliver either above or below that $1.5 billion.

So as reported, we are expanding capacity, but also absorbing that expanded capacity. And as time progresses were inevitably getting close to full capacity transaction with the first chip fab, and that's why we're working to close on a second facility. The specific number at which the first fab will top out is, I think, yet TBD. To your point, that target as of a year ago was a lot lower than it has been. And our version team is continuing to work to expand it to the extent possible. But we are in a privileged position that with limited capacity, we have the opportunity to select those engagements that makes sense strategically for the long term. And that's what we're doing. We're not sold out, but we're approaching capacity in [indiscernible]. And as we get closer, at least through the time frame before the second fab comes up, we're going to be very selective in our engagements.

And the next question comes from John Dillon with DMB Capital.

Congratulations on a great quarter. I've got a follow-up to the last question. And that's -- you stated your goal of $2.5 billion in revenue coming up here. And I'm wondering, are you planning on getting there with your existing factory? Or is it going to take a second fab to get there along with revenue plus the royalty income, can you get to $2.5 billion with your existing facility?

No. Okay. That's definitely No, it's going to take a second fab together.

Well, that kind of led into my follow-up. My channel checks are saying that you guys have [ Avago ], Google and AMD. And AMD, we've seen pictures of gold bars in the new processor. So how big are these going to be in the next year? And how are you going to have the capacity to serve them?

I'm not going to comment about sizings of gold bars anywhere. But so near to say, we have a very distinctive product. It's distinctive that is manufactured uniquely in a fab with 3D meter interconnect processes that give it its golden look. But to be clear, while it's got a golden look, it doesn't carry the cost of gold with it to the contrary. Among other things, we are going to have the lowest cost card. So I think we got exciting years ahead with respect to raising the bar on the revenue line and the profitability along the lines of what Phil was suggesting earlier. But it's going to take a second fab to get to those levels.

And how big will that second fab be? Will it be able to do $1.5 billion? Or do you expect it to be able to do more in revenue?

We are down selecting to size that have the word with all to support a considerable expansion as much as 2x potentially 3x the first fill.

And our next question will come from Richard Shannon with Craig-Hallum Capital.

I'm going to follow up on the last answer you produce, just to make sure I understand it here. So your first model of $1 billion was just with the first fab and as you just heard from your answers here, the $2.5 billion requires a second fab here. And if I heard you correctly, the second fab is going to be 2 to 3x the first fab. It seems like your -- you'd have the ability to do a lot more than $2.5 billion with both those fabs plus any licensing here. So wondering if you could rationalize the disconnect here, please?

So with the second site and the second fab, there's going to be a series of steps. This is not all going to be built out on day 1. ,[indiscernible] to say, we don't want to create unnecessary or premature depreciation. We're going to have a couple of steps to begin with, we're looking to essentially double capacity. But we are selecting sites that have the requisite expansion flexibility so that without having to go to a third site, we can further increase capacity.

Okay. That is helpful. And my follow-on question is on product gross margins. I'm assuming all the royalty revenue is 100% here. And if I back that out, calculated product gross margin is actually down a couple of hundred basis points from the last couple of quarters here. I wonder if you could help us understand the dynamics there and whether that's that trend to reverse itself here in the near future.

I think Jim commented expectations of increasing margins?