Earnings Call Transcript - VICR Q4 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Vicor Fourth Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jim Schmidt, Chief Financial Officer. Please go ahead.

James Schmidt, Chief Financial Officer

Thank you. Good afternoon, and welcome to Vicor Corporation's Earnings Call for the Fourth Quarter and Year ended December 31, 2025. I'm Jim Schmidt, Chief Financial Officer. And I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; Phil Davies, Vice President, Global Sales and Marketing. After the market closed today, we issued a press release summarizing the financial results for the three months and year ending December 31. 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 relating 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 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 or implied by any of our remarks today. The risks 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 the information provided during this conference call is accurate only as of today, Thursday, February 19, 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 Q4 and full-year 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 change for P&L and balance sheet items as well as full year-on-year changes and refer you to our press release or our upcoming Form 10-K for additional information. As stated in today's press release, Vicor reported product revenue for the fourth quarter of $92.7 million, up 4.5% from the third quarter total of $88.7 million and up 15.3% from the fourth quarter 2024 total of $80.4 million. Royalty revenue for the fourth quarter totaled $14.5 million, a 33.1% sequential decrease from $21.7 million in the third quarter and a 7.8% decrease from $15.8 million in the fourth quarter of 2024. The sequential decrease in royalty revenue was the result of a catch-up amount that was included in the Q3 results. Product revenues for the year ended December 31, 2025, increased 12.1% to $350.3 million from $312.5 million for the prior year. Royalty revenue for the year ended December 31, 2025, totaled $57.4 million, a 23.2% increase from $46.6 million for the year ended December 31, 2024. Total product revenue and royalty revenue, including a $45 million patent litigation settlement received for the year ended December 31, 2025, increased 26.1% to $452.7 million from $359.1 million for the prior year. Advanced Product revenue, which includes royalty revenue, decreased 4.4% sequentially, which was the result of the catch-up amount of royalty revenue in Q3. Brick Products revenue declined 0.6% in the third quarter. Revenues for Advanced Products for the year ending 2025 increased 26% to $248.6 million from $197.3 million the year before. Revenues for Brick Products for the year ending 2025 decreased 1.6% to $159.1 million from $161.7 million the year before. Shipments to stocking distributors decreased 11.1% sequentially, but increased 5.3% year-over-year. Exports for the fourth quarter increased sequentially as a percentage of total revenue to approximately 49.3% from the prior quarter of 42.8%. On a year-over-year basis, exports increased as a percentage of total revenue to approximately 50.8% from the prior year's 48.2%. For Q4, Advanced Products share of total revenue, including royalty revenue, decreased to 58.4% compared to 59.4% for the third quarter, with product share correspondingly increasing to 48.6% of total revenue. Turning to Q4 gross margin. We recorded a consolidated gross profit margin of 55.4%, approximately 2.1% less than the prior quarter as a result of the royalty catch-up in Q3. For the full year 2025, gross margin rose by 6.1% to 57.3% from 51.2% in the prior year. I'll now turn to Q4 operating expenses. Total operating expense increased 2.7% from the third quarter. For the full year 2025, total operating expense as a percent of revenue and patent litigation settlement decreased to 39.2% from 51.6% in the prior year. The amounts of total equity-based compensation expense for Q4 included in cost of goods, SG&A, and R&D was $1.08 million, $2.206 million, and $1.153 million, respectively, totaling approximately $4.4 million. For Q4, we recorded operating income of $15.7 million, representing an operating margin of 14.6%. For the full year 2025, operating income totaled $81.8 million or 18.1% of revenue in patent litigation settlement compared to operating loss of $1.3 million or minus 0.4% of revenue in the prior year. Turning to income taxes. We recorded a tax benefit in Q4 of approximately $27.3 million, representing an effective tax rate for the quarter of minus 142% as a result of the tax benefit due to the partial recognition of certain deferred tax assets in the period. The tax benefit for the full year 2025 was approximately $24 million, representing an effective tax rate for the year of minus 25.4%. Net income for Q3 totaled $46.5 million GAAP diluted earnings per share was $1.01 based on a fully diluted share count of 46,297,000. For the full year 2025, net income increased to $118.6 million from $6.1 million in the prior year. In 2025, fully diluted earnings per share increased to $2.61 from $0.14 in the prior year. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $402.8 million in Q4. Accounts receivable net of reserves totaled $60.7 million at quarter end, with DSOs for trade receivables at 44 days. Inventories net of reserves increased 1% sequentially to $91.3 million. Annualized inventory turns were approximately flat sequentially at 1.96. Operating cash flow totaled approximately $15.7 million for the quarter. Capital expenditures for Q4 totaled $5.5 million. We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $7.8 million, with approximately $6.9 million remaining to be spent. I'll now address bookings and backlog. Q4 book-to-bill improving sequentially, came in well above 1 and with 1-year backlog increasing 15.8% from the prior quarter, closing at $176.9 million. 2026 is a year of great opportunity for Vicor. We are working to deliver on the opportunities. However, given that we cannot predict with certainty the timing or amounts of outcomes relating to our licensing practice, we will not provide quarterly guidance. With that, Phil will provide an overview of recent market developments. And then Patrizio, Phil and I will take your questions. I ask that you limit yourself to one question and a related follow-up so that we can respond to as many as we can in the limited time. If you have more than one topic to address, please get back in the queue.

Philip Davies, Vice President, Global Sales and Marketing

Thank you, Jim. At the beginning of 2025, we talked about the year ahead being one of challenges and opportunities. As we look back, 2025 met those expectations with improvements in product bookings and revenues in Q4 and our IP licensing practice becoming a major contributor to our top and bottom lines. As we exited 2025, book-to-bill ratio increased to over 1.2 in Q4 and has continued to increase in Q1. At the start of 2026, we can say that this will be a year of different challenges and greater opportunities. This should result in record bookings, revenues, and profitability and significantly higher utilization of our first chip fab. As Patrizio commented in today's press release, the United States International Trade Commission has instituted a second investigation into illegal importation of power modules and computing systems, infringing Vicor's IP to nonisolated bus converters. By now, it should be clear that Vicor will methodically and relentlessly enforce its intellectual property to the many inventions it pioneered and that suppliers of infringing systems are putting themselves and their customers at risk, including unlicensed OEMs and hyperscalers. Following the example set by licensed OEMs and hyperscalers, companies with an ethical backbone should do the right thing, avoiding infringement by taking a license to secure their supply chain. Our lead customer for VPD solutions is ramping a Gen 4 factorized power system before transitioning to a Gen 5-based solution with higher current density and performance. This transition is expected to start in the second half of this year, while production of the Gen 4 system will continue to ramp at a steep rate to the end of 2026. Engagement with other Gen 5 VPD customers will be selective as capacity in our existing first chip fab is getting earmarked for strategic customers, and additional capacity from our second chip fab may not be available until 2028. Our industrial and aerospace and defense business outlook for 2026 is strong, particularly in the automatic test equipment market, which is seeing substantial growth and projecting high growth to last for the next several years. Given our power density advantage, which is of paramount importance to our customers, I am confident that we can double the revenues in these markets over the next four to six years, respectively. As we approach high utilization of our first chip fab, we are beginning to engage customers in capacity reservation agreements to secure their supply needs. While in the planning stages of a second chip fab to expand the market opportunity, we are having discussions with candidates for an alternate source of high current density Gen 5 VPD solution. An alternate source will give licensed OEMs and hyperscalers broader access to best-in-class power system technology. In view of these developments, we remain confident in our business strategy of innovation, customer focus, and market focus. With that, we'll now take your questions.

Operator, Operator

Our first question comes from the line of Quinn Bolton of Needham & Company.

Quinn Bolton, Analyst

Congratulations on 2025 and the record outlook for 2026. Patrizio or Phil, I wanted to start with your lead customer. It sounds like you're seeing a pretty strong ramp from that customer. And you mentioned that Andover is getting filled. Can you talk about whether Andover is being filled largely from your lead customer? Or do you have other significant Gen 4, Gen 5 customers that are contributing to that growing utilization in the Andover facility?

Patrizio Vinciarelli, Chief Executive Officer

It's a combination of demand, increasing demand on a number of fronts, not just high-end computing where there are multiple factors at play with respect to increased demand on capacity, but also in test equipment, as Phil mentioned in his prepared remarks and some of the other end markets.

Quinn Bolton, Analyst

Got it. Okay. And then I guess maybe a follow-up on the IP licensing. In the press release, you talked about seeing record revenue from the IP licensing business this year. Just wanted to clarify, does that include or exclude the $45 million patent litigation settlement that was part of the 2025 revenue stream as we think about 2026?

Patrizio Vinciarelli, Chief Executive Officer

We see our licensing business expanding. As Jim suggested earlier, the timing of elements contributing to the expansion is somewhat unpredictable. But as we look at the predicament that OEMs and hyperscalers face in terms of potential exclusion orders, we see a major opportunity for us to grow our licensing business considerably. As we have discussed in our last quarterly call, we see that business expanding greatly in the last couple of years. I think what has transpired since then suggests that those are conservative estimates.

James Schmidt, Chief Financial Officer

And Quinn, just to clarify the number for you, the royalty revenue I quoted in my prepared remarks of $57.4 million in 2025 does not include the patent litigation settlement. That's royalty revenue, and it was up 23.2% from $46.6 million in 2020.

Quinn Bolton, Analyst

Got it. But just to clarify, Jim, when the comment in the press release about the business, the licensing business will expand, are you looking at the $57.4 million as the 2025 base? Or should we be thinking about that base being $102 million, which would include that $45 million patent settlement as part of the base?

Patrizio Vinciarelli, Chief Executive Officer

So for one thing, there are going to be more patent settlements. And for another, the one patent settlement from last year in terms of the outlook for the licensing business, it doesn't really make a substantial difference with respect to the upside in this part of our business. We expect hundreds of millions of dollars worth of revenues from licensing and the $47 million event last year is in hindsight going to be in the bucket for sure, but not all that significant.

Operator, Operator

Our next question comes from the line of John Tanwanteng of CJS Securities.

Jonathan Tanwanteng, Analyst

And also congratulations on a good year. I was wondering if you could give us a little bit more detail on the launch customer for VPT. You mentioned that they were going with the Gen 4 product. Could you talk about the decision that went into that and why they aren't starting with Gen 5 and kind of how that happened?

Patrizio Vinciarelli, Chief Executive Officer

Well, so the Gen 4 system is mature. It's one that's got a track record of success that is expanding in terms of its opportunity in order to get to the next-generation system, a mature design, a mature system. It's not just the power systems; the system as a whole needs to come to fruition. It isn't quite there yet. It will be there soon, and that will lead to the next set of opportunities. But to be clear, with our lead customer, we're seeing a significant share of our capacity being utilized as we get towards the end of this year on the earlier generation system. And the next-generation system will provide an additional layer of use of capacity as we get into next year.

Jonathan Tanwanteng, Analyst

Understood. Are you considering a new facility, and if so, will you build it yourself or collaborate with partners in a capital-light manner? Additionally, what capacity do you expect the new facility to have?

Patrizio Vinciarelli, Chief Executive Officer

So we've made two offers on areas where we could build a facility. The lead time associated with that, though, is 1.5 to 2 years when everything is done. We are also looking at existing buildings within a 30-mile radius of Andover to the North and the West. And we haven't decided yet which of these alternatives we're going to close on. But again, we've had two offers. No deal done yet, but I would expect that we're likely to do something on this soon.

Operator, Operator

And our next question comes from the line of Richard Shannon of Craig-Hallum Capital Group.

Richard Shannon, Analyst

I'll also add my congratulations on a really good last year. My first question is on royalties and licensing here. As you mentioned, there are some questions here in the Q&A about growth in this business. I guess I wanted to triangulate it differently from how you've talked about in the past where you're hoping to get a roughly $300 million revenue stream. I know that's not entirely royalties; maybe some product in there, but talking about a $300 million bogey between '24 and '26. And by my numbers, at least that would require a fair amount of growth, like doubling or so of your royalty revenues from '25 to '26. But you didn't talk about it that way this quarter. Can you maybe talk about it in those terms here? Is that a number that we should continue to expect better or worse? Just help us triangulate those things.

Patrizio Vinciarelli, Chief Executive Officer

Yes. So we have two major licensees. We expect to have a lot more, and future contribution from those two should become quite a bit larger. So I think in one way of looking at it, in high-end computing AI, systems require from the power system perspective, our IP. And to the extent that in order to be able to deploy those systems, a license will become necessary. that defines the opportunity. As you can see, the opportunity far exceeds what we've harnessed thus far. There's a lot more to be captured in years to come. So the $300 million number, which to your point involves contributions from royalties and business, licensees is not a long-term goal. It is a relatively near-term goal, not for this year, to be clear, but as we have said last year in a couple of years' time frame, but we can see going beyond that.

Operator, Operator

Our next question comes from the line of Philip Davies of CJS Securities.

Philip Davies, Analyst

Yes. So Richard, this is Phil. So maybe I can get a little bit more granular on that. So the next step for us is over the next couple of weeks; we're bringing in our global FAE team that is dedicated to supporting customers in different locations where we have target hyperscalers and OEM chip companies located. So they will be going through, if you like, a boot camp on Gen 5 VPD using the demo boards and tools that central applications group here in Andover have developed for the market. And so that's happening in the next couple of weeks. After we get that in place, as we talked about, we're going to be fairly selective in who we're going to be engaging with. It's very important we do that. And so that's the next step after that. So our FAEs are here in the next couple of weeks, and we're on the way.

Operator, Operator

Our next question comes from the line of Justin Clare of ROTH Capital Partners.

Justin Clare, Analyst

So first, I just wanted to follow up on the potential for capacity expansion here. So given the plan to add a second fab, I was just wondering how we should think about the ramp in utilization for your existing facility, how we think about that over the next couple of years and kind of what utilization threshold you anticipate reaching that is necessitating the additional fab here? And then just if you could talk about when you anticipate kind of approaching that optimal utilization for the first fab?

Patrizio Vinciarelli, Chief Executive Officer

So based on ramps with our customers in different markets with a strong contribution from high-end computing, we see the existing fab being well utilized within a year. And that's obviously prompting the initiative to secure additional capacity, both by bringing up a second fab and by having discussions with potential alternate sources that could provide customers with equivalent solutions using their own capabilities and our technology. In terms of the fabs, as I mentioned earlier, we've started exploring the opportunity of being about with a large piece of real estate, the flexibility to increase capacity in steps. As I remind you, this will be a campus that could support up to 0.5 million square feet of manufacturing space. Just to set things in perspective, the facility is around 300,000. So there would be substantially more in terms of the real estate available for capacity. But also given the learning that we've done, we think we can achieve more capacity per unit of area in our next facility. The thinking of late has evolved though more towards potentially acquiring a building. And to be clear, there's been no decision one way or the other yet. It could go either way. But the benefit of doing it with an existing building is that the time to fruition would be a year, or 1.5 years shorter. So we might go that way. It would be on the same scale, though, in terms of the increment of capacity that we want to bring about with the second.

Justin Clare, Analyst

Okay. Got it. That's helpful. And then just when you think through this, if you're reaching close to kind of optimal utilization within a year, I think historically, you've talked about your fab being able to support $1 billion in product revenue. So within a year, could you be close to that level where you're getting to a run rate of $1 billion in product revenue? And then just curious on the second fab, how much in CapEx spending you might anticipate in terms of what's required there?

Patrizio Vinciarelli, Chief Executive Officer

Yes. So to be clear, the fab has a capacity, given the dollars per panel and the number of panels it can process, of time to do slightly above $1 billion in revenues. But you wouldn't want to use 100% of the capacity because by definition, that will leave no room for error, right? So an 80% capacity utilization is the kind of number that you want to think of in terms of the test or fundamentally having achieved a very good capacity utilization. Now in terms of the next facility, whether it's by acquiring land, putting up a building, and then equipping it with what is necessary in order to bring about that relative incremental capacity. This is in a proposition of the order of $250 million or $300 million, something that Vicor has to finance on its own given our cash position and our balance sheet.

Operator, Operator

And our next question comes from the line of A. Hicks of Ainsley Capital Management.

Alan Hicks, Analyst

I just wanted to confirm it's $1 billion capacity now.

Patrizio Vinciarelli, Chief Executive Officer

I think we lost part of your question. I think the question was you wanted confirmation of the $1 billion capacity of Fab 1. Was that the question?

Alan Hicks, Analyst

Yes, just for Advanced Products, nothing else.

Patrizio Vinciarelli, Chief Executive Officer

Yes, we are very confident that we can generate upwards of $1 billion worth of revenues out of.

Alan Hicks, Analyst

Okay. Because I'm looking at what your sales were for just for Advanced Products, without royalties for the year was around $200 million. Is that for 2025?

James Schmidt, Chief Financial Officer

Yes.

Alan Hicks, Analyst

Okay. So you're saying within a year or so, you could be at $800 million in Advanced Products?

Patrizio Vinciarelli, Chief Executive Officer

As suggested in an earlier question and confirmed by me, that would be a run rate.

Alan Hicks, Analyst

Okay. And then on the bricks, the original bricks fab, could that be converted in the future to Advanced Products?

Philip Davies, Vice President, Global Sales and Marketing

So no, the bricks are much older products. They've got a very stable, if you like, customer base. So some of those customers are moving to advanced products, and we've had quite a bit of success with that in recent years in some higher volume end markets, but aerospace and defense and some very broad-based industrial, they like the bricks. They're going to stay with the bricks. So the brick piece will be fairly stable over the next few years. I believe...

Patrizio Vinciarelli, Chief Executive Officer

Bricks don't really play a role with respect to capacity utilization. They become a minor percent of the business.

Alan Hicks, Analyst

Okay. But you're also adding capacity to this first fab. Is that correct also?

James Schmidt, Chief Financial Officer

Yes, we are.

Alan Hicks, Analyst

Okay. And then did you say you're in discussions with a partner to have them produce products themselves?

Patrizio Vinciarelli, Chief Executive Officer

Yes, we are engaged in discussions which may take some time because this is an important decision. We have customers expressing a desire for an alternate source. We recognize that having an alternate source could enhance our market opportunities. Considering the vast potential in AI, it would be unrealistic for Vicor to handle it alone, even with a second and third fabrication facility. Therefore, we need to capitalize on this opportunity rather than restrict it by attempting to manage everything ourselves.

Alan Hicks, Analyst

Then I was just kind of curious, how many panels can you produce in a day out of the factory you have now?

Patrizio Vinciarelli, Chief Executive Officer

I'm not going to quantify that for competitive reasons. I will just say that in terms of the revenue opportunity of the fab, Fab 1 is slightly above $1 billion a year.

Operator, Operator

Our next question comes from the line of John Dillon of DMB Capital.

Unknown Analyst, Analyst

I'll make this quick because I know we're up against the timeline. First of all, Patrizio, thank you for answering Quinn's question. That was one of my follow-up questions also, and I appreciate that answer. My other one is just a quick one. We're halfway through the quarter, and I'm just wondering how bookings are looking so far this quarter.

Philip Davies, Vice President, Global Sales and Marketing

I mentioned in my prepared remarks, the book-to-bill was 1.2 in Q4, and we're above that already in Q1.

Operator, Operator

This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.