Quarter 1
Q2 2026 Earnings Call — July 21, 2026
Analyst: Quinn Bolton (Needham and Company): Hey you guys, 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 VPT to a broader customer base. Do you still feel like you're on track to secure a ramp Designs with either hyperscaler or other OEM customers with second-gen VPD over say the next 12 to 18 months?
Executive: Management: Yes, so we've completed development with respect to a baseline of 3 amps per square millimeter current density with 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 raising the bar fast for apps 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 a roadmap to expand on that.
And beyond the lead customer, Patrizio, would you expect DesignWinds 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 visits just last week. There's 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 VRs from 12-volt to 6-volt to 1.8-volt inputs, is that they're barely capable of delivering the real world slightly over 100 square millimeters. That's the message we're getting consistently from people in the know. When you look at all the factors at play, thermal deriding, other factors, the competitive capability is quite limited, barely above 100 per square millimeter. And the market need, particularly with respect to, you know, welfare scale engines, other advanced HPC system, is already above those levels and projected 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, just any updates on securing a site with or without building for your second chip fab?
So we have several options at this point. It made some offers. None of them was taken up yet, but we have the environmental choice at this point and we'll probably be making decisions in the last few weeks.
Analyst: Richard Shannon (Craig Hallam): Great, guys. Thanks for taking my questions. 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 licensee or 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.
Executive: Management: Okay, Richard, I'll reread that paragraph for everyone. So 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. 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 four 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, you know, characterizing this customer here, OEM, hyperscaler, etc., and whether this has been a past customer as well, please.
I can 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, one hyperscaler 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 response to one of the past questions here about IVRs. The statement here in the press release about feeding IVRs with the criminal supplier is 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 VPT solution here. So I'd love for you to help us understand that a little bit better.
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, highly fragmented set of nodes, there's something to be said for IVRs in that they do provide a great deal of flexibility, configurability. But that counts 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 at a lower frequency and they still have transient undershoots, which causes our factorized power system no longer has. So we have a huge efficiency advantage relative to these competitive alternatives. But that doesn't mean we can't play a support role for those alternatives and capture significant business.
Analyst: Justin Clare (Roth Capital): Hey, good morning. Thanks for taking our questions here. So I wanted to touch on the guidance. So updated your 2026 guide to over 600 million here. It looks like that 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, wondering if you'd 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 on, 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 nature of these relationships going forward with OEMs and hyperscalers.
Got it. Great. Thanks. 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, you know, 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 expansion. 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.
Well, so as reported, we are expanding capacity, but also absorbing that expanded capacity. And as time progresses, we're inevitably getting close to full capacity utilization 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 operations team is continuing to work to expand it to the extent possible. But we are in a position in that with limited capacity, we have the opportunity to select those engagements that make sense strategically for the long term. And that's what we're doing. We're not sold out, but we're approaching capacity utilization. And as we get closer, at least to the timeframe before the second FAB comes up, we're going to be very selective in our engagements.
Analyst: John Dillon (DMB Capital): Hi. Thank you very much. And guys, congratulations on a great quarter. I've got a follow-up to the last question. And that's that you've stated your goals 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 you know along with revenue plus royalty income can you get to 2.5 with your existing facility?
Executive: Management: No. Okay. There's a definite no. It's going to take a second fab to get there.
Okay. Well, that kind of lights 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, you know, on their 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 sightings of gold bars anywhere. But... So, as you say, we have a very distinctive product. It's distinctive in that it's manufactured uniquely in a fab with three-dimensional 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, on 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 now selecting two sites that have what we told to support a considerable expansion as much as 2x, potentially 3x the first file.
Analyst: Richard Shannon (Craig Hallam Capital): Great, guys. Thanks for taking a follow-up here. I'm going to follow up on the last answer here, Patrizio, just to make sure I understand it here. So your first model of $1 billion was just with the first FAB. And as we just heard from your answers here, the 2.5 requires a second FAB here. And if I heard you correctly, the second FAB is going to be two to three times the first FAB. Seems like you'd have the ability to do a lot more than $2.5 billion with both those FABs plus any licensing here. So, I wonder 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 automatically on day one. Needless to say, we don't want to create unnecessary or premature depreciation. We're going to have a couple 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 side, we can further increase capacity.
Okay, that is helpful. Thanks for that. And my follow-on question is on product gross margins. I'm assuming all the royalty revenues are 100% here, and if I back that out, calculate a product gross margin. It's actually down a couple hundred basis points from the last couple of quarters here. I wonder if you can help us understand the dynamics there and whether that trend will reverse itself here in the near future.
I think Jim commented expectations of increasing margins. Yes. And so we... There was a... There will be lift in the GM, product GM going forward, Richard, as we get utilization to go higher and absorption to go higher. I will say that there was sort of a, maybe one time, but an important event here in the second quarter relative to moving equipment around in the first FAB to make space for the equipment that's coming in. So that was incremental expense and cost of sales in the period that did not get capitalized and cannot be capitalized. So that did weigh on product gross margins as well. So you can imagine what had to happen in the factory to make the space really optimized for the new equipment coming in. It wasn't cheap to do that.
Analyst: Neil Gore (Stockholder): Your goal of $2.5 billion, within that goal, will royalties be at 50% of revenue at that time?
Executive: Management: I don't think we're in a position to make a specific position with respect to the mix. I think there's a lot to happen on the AP front. If Vigor is enabling technology on all of the areas where the industry has needs for increased current density or increased power density. So this will play itself out over a number of years. And the outcome of this campaign is still to undergo the steps we're going to need to take and the effect of those steps. So I think all that I can say is that we see significant expansion in licensing income in years to come. We do expect a crossing of the chasm within the industry by hyperscalers, bounce OEMs, recognizing that playing a game of catch me if you can will result in significant issues in terms of the supply chain. If they're using our technology.
Analyst: Quinn Bolton (Needham & Company): Thanks for taking my follow-up. Patrizio, I wanted to come to the licensing side of the business. The second license with your first licensee as well as your most recent license looks like those were, I think, just a couple of years in duration, which probably means you need to re-sign licenses as you get close to the end of 2027. Can you just, from a big picture level, talk about your strategy with new licenses as you look to expand to include more of the vertical power delivery content or sourcing agreements, but any... Can you provide any high-level thoughts on resigning those licenses as the current licenses come due?
Executive: Management: Yeah, so we have a well-defined, mature licensing practice. It's got flexibility where needed. It is not up for grabs in terms of Flexibilities that don't make sense. So it does involve any OEM, any hyperscaler. It does not involve competitors. Competitors can participate without infringing our IP by sourcing their products, otherwise infringing products into OEMs or hyperscalers that have a license from Weigel. The licensing model has involved already two kinds of licenses. One, you might call a proportional license, which provides for unit royalties in direct proportion to actual usage. We also, in more recent years, have done two-year deals that are, in effect, all-inclusive. With these deals, we understand, given the limited timeframe, what the current usage by the licensee is going to be. But needless to say, given the rate of expansion with hyperscalers and OEMs in the AI market in particular, it would be very difficult, if not impossible, to predict their level of business five, ten years down the road. With all-inclusive licenses, by necessity, we have to have a short time frame and then negotiate the new license depending on how the business by the licensee evolves during the two-year period.
Analyst: John Dillon (DMB Capital): Thanks for taking my follow-up. Hey, Phil, I just wanted to check with you. How are the bookings looking for this quarter?
Executive: Management: As I mentioned, I think it mentioned in the press release, John, the bookings are great. I mean, our bookings tend to be, can be lumpy. So sometimes, you know, we've reported book the bills of close to two. This one was a little bit lower, but I don't see any weakness at all. Going forward, aerospace and defense is strong. Industrial is very strong. High performance compute is strong. So, yeah, no, things look good.
Excellent. And in the last press release, you talked about an OEM and you said they had a capability of being a second source. My question is, will they be a second source? And if not, how's a second source coming along for you guys?
So as commented throughout this meeting, a strategy in the short term is involved with a focus on bringing on additional capacity to a second facility, a second chip fab that we can totally control. We've had discussions with respect to potential alternate sources. There will likely be more discussions but the natural disengagements both in terms of predictability timeline is such that it would not put us in the position we need to be in terms of expanding capacity for key customers in the next couple of years.
Analyst: Richard Shannon (Craig Hallam Capital): Thanks for taking my follow-up again here. At the risk of asking a very similar question to the last one here, instead of asking about Cerebrus going forward here, can you tell us whether Cerebrus was a 10% customer in the second quarter? Are we at liberty to say?
Executive: Management: I think we'll disclose that in the queue, but I don't know that it would have been, Richard. So I don't know that I can comment right now, but let's take a look at the queue.
Okay, I'll look forward to reading that. My follow-on question here is looking at the next customers for second gen VPD here and love to get a sense of how you expect the sales cycle to go and Patrizio also if you could comment on the degree to which any changes in architectures in whatever way that you would deem important to convey to us here how those will...
Executive: Management: Let me take the second part first and then Phil will address the first part of your question. So as suggested earlier, we see the industry with its usual traits of looking over each other's shoulder and parroting each other's initiatives. To keep going down a path that is characterized by continued toll dependency on a voltage-regulated engine at the point of load. That's fundamentally a flow strategy. It's not going to work. As suggested in the earlier comments, it's a strategy where you can only get some incremental current density well below what's going to be needed before too long. are at the expense of giving up on current gain. And that doesn't solve the problem, a problem which requires a combination of high enough current density with overall high enough current gain. Now, if you don't have the current gain, as suggested earlier, and that's been the catalyst for being approached by a couple of companies, you can use AVRs to stretch somewhat the current density capability, but still short of what's going to be needed. A dispenser requiring a still very high current bus converter of 1.8 volt.
So that's a strategy that's got tradeoffs, as suggested earlier, it's got some good redeeming features, you know, flexibility in terms of partitioning domains. It's great at that, but not far from ideal in terms of overall power system figures. So we see a different approach and it's reflected in the power system technology that we developed, parented. It's reflected in a chip as in converter housing package. Packaging technology that can only be made in chip fabs that are heavily protected by Viagra IP. And that's the strategy we're pursuing.
So Richard, this is Phil. So with regards to the cycle, the development cycle, if you like, if you go back just a few months to the APEC conference in San Antonio, Texas, you had a number of big OEMs and a few hyperscalers almost sort of lobbying the semiconductor audience on their AI product development in terms of saying, you know, here's what we need from you guys with regards to current density, which they were asking for something around three amps per millimeter squared, and package height. You know, in terms of thermal management and just assembly and yield issues of less than three millimeters. And you look at what's being developed and delivered to these OEMs and hyperscalers today is generation one VPD that comes nowhere near that request. And so you can imagine the excitement that's out there to engage with Vicor that has three amps per millimeter squared now moving to five amps per millimeter squared next year, early next year, and a 1.5 millimeter package with very easy thermal management techniques. So there's a lot of companies that want to engage because they're sort of making do with the current Gen 1 VPD solution.
So what we expect is engagement with a hyperscaler and a couple of OEMs now this rest of this year. I believe that those programs will start to, if you like, evolve into production systems sort of, I would say, late third quarter, fourth quarter of next year in terms of the ramps that are needed, which then, as Patrizio mentioned, allows us to move into our first fab. And then as we bring on the second fab in late 27, 28, you've now got the ramp that that follows through into that new facility with its expanded capacity. So that's what we expect to see.
Analyst: Don McKenna (DB McKenna): Hi, guys. Congratulations. And my question deals with the backlog. I was wondering how much of the significant increase there is attributed to the new licensing agreement, if any?
Executive: Management: Relatively little.
I'm sorry?
Relatively little. So we have, as Phil pointed out, strengths coming from a number of different markets. Take as an example the ADE market. Our level of business with key customers there is a large multiple of what it has been in past years. And that's the result of the build-out with respect to AI. So that's just one example of growing demand coming from a multiplicity of end markets which we need to address.
Yeah, just a comment on the automatic test equipment market. That's a great story because it's also a factorized power architecture that relies on low noise performance and thin package technology. We've had a number of competitors come up to us in different shows saying, we just can't get VICO out of there because of the low performance, low signal to noise ratios that we are able to deliver, and also the thinness of the packages. We can't get anywhere near that. So it's a great market for us, and we're firmly entrenched in some of the biggest ATE companies, and that market is also growing with new entrants in overseas markets that we're also designing in our FPA solutions into. So that's going to continue to be a good growth story for us going forward.
Great. So I think what I'm hearing you say is it's existing customers with increased needs.
Yep.
And as for the bulk of this is coming from. But do you also see any of it being just the fact that as you're nearing capacity, people are putting in their orders for farther out deliveries?
Yes, early times has fleshed out a little bit. But they're generally speaking consistent with industry trends. Nowadays, what is... semiconductors, PC boards. Some of the key components within the industry have had to reflect the realities of demand exceeding capacity in a number of key areas, not just ours.
Analyst: Joe Dababny (Individual Investor): Hey, guys. Thanks for taking my question. I was just wondering if you could speak a little bit about how the next generation advanced packaging architectures are going to help proliferate Gen 2 VPD across the industries.
Executive: Management: It's just got, by far, the biggest current density, the lowest thermal resistance, the lowest noise. Phil pointed out earlier that in the DAT arena, we've had longstanding, when I say longstanding, I mean 40 years track record of dominance because of the unique signal integrity capabilities of our product. Those are also differentiators, believe it or not, in AI, in computing capabilities that more and more are relying on nodes with final lithography operating at lower and lower voltages, where signal integrity becomes more and more of activity of differentiators. So we are unique in these capabilities. And again, that uniqueness is not limited to one facet of the overall challenge. It involves many different facets, all of which are heavily protected in terms of the IP we've been developing over the last 10 years. So we feel very good about our opportunities going forward for all those reasons.
Great, thanks. And then one more about the recent licensee that signed in May. Can you kind of speak on what would have happened to the supply chain if that license was not negotiated by them?
Well, so we have a well thought out strategy with respect to protecting international property, enforcing an IP. As you know, in the US, a patent holder has a monopolistic right to the IP that is protected by patents, and their right is a right to exclude, among other things, importation of infringing products. And infringing products are not limited to power modules copied by unscrupulous competitors. It does involve the competitors' customers, the contract manufacturers, and those customers' customers, OEMs, hyperscalers, it's incumbent on them to make sure in the supply chain that intellectual property is respected. Inventors deserve to have their IP respected in the marketplace and we've been very focused on a very comprehensive strategy to make sure that our IP gets the respect it deserves. and I think we have made sides in that direction. There's more sides coming and as I mentioned earlier, I believe there's going to be a crossing of the cows in the industry taking place in the next couple of years.
Analyst: Patrizio: I appreciate that Patrizio, thank you.
Executive: Management: This does conclude today's question and answer session and this will also conclude today's conference call. Thank you so much for your participation and you may now disconnect.
Quarter 2
Q1 2026 Earnings Call — April 21, 2026
Quinn Bolton (Needham & Company):
Our first question comes from the line of Quinn Bolton with Needham & Company. Hey, guys. Congratulations on the nice results and outlook. I guess I wanted to start with just the assumptions you're making around 2026 for the IP licensing business. Looks like royalty revenue in Q1 was about $15 million or about $60 million annualized. I know you're not assuming any additional or new licenses signed, but where do you see royalty or licensing revenue this year as part of that 570 guidance?
Management: The 570 guidance includes royalties, which would increase somewhat based on existing licensing agreement. In terms of providing, in effect, safe guidance, we thought it would be best to set aside any opportunity with respect to, if you will, early deals relating to current actions. So our working assumption for guidance purposes is that we're not going to have any until we get to further demination or a second case next year, but it could be that we do get some ahead of that timeframe.
Quinn Bolton (Needham & Company): Understood. And then, Patricio, last quarter, you seemed pretty confident that the utilization in Andover would approach 80% by the end of 26 or early 2027, looks like you're on a strong product ramp, but are you still sort of comfortable or still expecting utilization to sort of achieve those levels that you discussed last quarter?
Management: Yes, in absolute terms with respect to product revenues, what has transpired since we last spoke on this topic is that we actually have significant level of elasticity with respect to expansion capacity within the fellow seed facility that's giving us a little bit more flexibility with respect to the timing and choice of the location for the second fab. So to get a little bit more specific we've seen an opportunity for a relatively significant expansion in capacity. It could be as much as 50% above what had been planned to be supported in terms of annual revenues out of the federal state facility. So that gives us caution with respect to timing, which we're putting to good use in terms of the choice of a location. And to give you a little bit more flavor with respect to that, we've also come around to focusing on existing buildings as opposed to a piece of land because of the fact that with an existing building, we can execute much more rapidly in terms of capacity expansion. And part of the strategy with respect to getting more out of the federal state facility is to selectively source outside of that facility some of the process steps that can be more easily relocated. So that should give you the picture with respect to both the capacity utilization and the plants with respect to capacity expansion.
Quinn Bolton (Needham & Company): Sorry, Patricio, just a quick clarification. Did you say that in the first handover facility, you would be outsourcing some manufacturing steps either to third parties, or would that be to the second chip fab?
Management: It would be to an interim location for the second chip fab. But this would still be totally within VIGO control. But there are process steps that can be easily located in a nearby building. And that's part of the plan to extend capacity of the LFL State Facility. Understood. Thank you. I'll get back and keep.
Justin Clair (Ross Capital Partners):
Our next question comes from the line of Justin Clair with Ross Capital Partners. Hi. Good morning. Thanks for the questions here. I think first off, you mentioned engagement with additional VPD customers I think could follow the generational transition for the lead customer from Gen 4 to Gen 5. I was wondering if you could just provide an update on the anticipated timing of that transition. I think you had previously been looking for the second half of 2026, and then trying to get a sense for when the potential orders with additional customers could be and what the revenue timing might be.
Management: Yeah, so the generation transition we're referring to here, it will be enabled in the second half of this year, and we expect a ramp to begin before the end of this year with respect to that next generation capability with the lead customer. And we will follow that with additional customers for second gen VPD solution. As Phil pointed out earlier, we are planning for the increments of capacity that we're going to have available to support opportunities that are, as in the case of a lead customer, long-term strategic to Viagra. And fundamentally, in spite of capacity expansions, we expect to remain capacity constrained for a substantial timeframe. And that leads us to want to pick the right timeframes companies, the right applications, where as in the case of the lead customer, we can make a very substantial difference with respect to levels of performance and opportunity to win substantial market share.
Justin Clair (Ross Capital Partners): Got it. Okay. And then just on the backlog, so in Q1 backlog increased significantly here to just over 300 million. wondering if you could speak to, you know, how quickly you anticipate turning that over. And then, you know, assuming you get to, well, and then I guess just as the business continues to scale, how do we think about the lead times and the conversion of that backlog? And then maybe how much backlog you think may be necessary in order to support the $800 million run rate that you have previously talked about?
Management: Well, so starting with Q2, the bookings are just as strong as they were in Q1. So we expect to, once again in Q2, have a very strong book-to-bill. So the backlog is going to keep building up as we step up the revenue levels and capacity utilization as the year progresses.
Management: Phil, do you have...
Management: No, I think the question was the existing backlog. I mean, that rolls pretty much over the next 12 months. That's how we recognize it. So, yeah.
Justin Clair (Ross Capital Partners): Got it. Got it. Okay. Justin, in any backlog we quote, the bookings we quote, it's always a 12-month window. Got it. Okay. And then maybe just one more on the capacity. So you're talking about expanding capacity at FAB1?
Management: Yes.
Justin Clair (Ross Capital Partners): How much capacity do you anticipate adding? What level of revenue do you think could be supported by the first FAB? And then I think you had talked about this a little bit in terms of the potential size of FAB 2, but I'm not sure I caught it. So maybe just what revenue level could be supported by the second FAB?
Management: So you might recall in the past we had earmark capacity out of FAB 1 at roughly a billion dollar per year run rate. We see a way to get that to at least one and a half billion at this point. And that's coming out of a combination of initiatives we've identified with certain process steps that have been historically capacity limiting overall. opportunities to get to a shorter cycle time and increase capacity with those steps. So that's a key element of this capacity expansion plan. To complement that, as I mentioned earlier, we see opportunities with process steps that are not as critical and which can be easily redeployed. an opportunity to redeploy them in an existing neighboring facility. Again, as a stepping stone to the second FAB, which has got a longer lead time in terms of what it takes to bring it to fruition. So we believe this approach gives us a lot more flexibility it will improve our opportunity for significant margin expansion because we will not be incurring for a certain level of total capacity as much in terms of additional equipment and depreciation. And overall, it's a plan that meets the combination of objectives that we sell ourselves and the need to support a variety of market opportunities, not just in the computer space, but in the other markets where we're seeing considerable strength.
Justin Clair (Ross Capital Partners): Got it. Okay. Thank you. I appreciate it.
John Tenwanting (CJS Securities):
Our next question comes from the line of John Tenwanting with CJS Securities. Good morning. Thank you for taking my questions, and congrats on the next quarter and the strong orders and outlook. My first question is, Patrizio, you mentioned you expect to be capacity constrained before you expect the new FRAD to come up, and I don't know if the expansions will occur before that as well, but what does that mean for your customers and their sourcing strategies? Do they need to turn to your competitors, or do you have some kind of licensing strategy that you may employ or have in mind to help them avoid that constraint? Just help me understand, you know, what the timing is around their growth trajectory is and what you expect your capacity to be underlying that.
Management: So, first of all, we purchased a second 3DI or three-dimensional interconnect line that's going to be installed in the Q3, Q4 timeframe. So, that in and of itself is an element of the capacity expansion plan. Second, as I mentioned earlier, within each of the 3D interconnect lines, we have identified ways to reduce cycle time and increase capacity in inverse proportion. Beyond that, we have expansion plans outside of the federal seed facility, and we are engaged in discussions that could lead to another source for a second-gen VPD technology, which we believe is going to be in great demand for a variety of reasons in years to come. Because fundamentally, it is the only way we know how to address the current demands processors with all of the right attributes. The way it is done with competitive alternatives that to some degree build upon what we call a first generation of EPD technology is, as suggested in the earlier remarks, challenged in a number of respects because of the, in other words, current density. is fundamentally a dominant effect. In other words, current density forces stacking of the elements of the solution.
The stacking has mechanical complexity and terminal challenges because the heat gets trapped within the stack. It's fundamentally inept at keeping up with escalating current density needs in future generation of processors. So even though we have ambitious capacity expansion plans, we see an alternate source playing a key role in years to come in terms of achieving greater overall penetration and win-win opportunities in the marketplace.
John Tenwanting (CJS Securities): Got it. Thank you. Could you also talk about the upcoming 800-volt data center architecture and the potential for transition to like a six volt intermediate bus and where your 48 to 12 volt systems sit within that? Do you expect maybe the NBM market to continue to grow as those architectures take share or is there a transitory period where maybe that falls off and maybe transitions to your VPD technology and licensing and royalties on that side?
Management: So we believe the initiative to go directly from 800 volt to 6 volt is frankly ill-conceived. It's internally inconsistent, and it's relatively easy to understand why. The logic of bussing power at 800 volt is predicated on that power distribution being at a higher voltage, more efficient. And there is an opportunity to improve efficiency by a few percentage points through the use of an undervolt bus. But inheriting that is the opposite effect at the other end of that proposed bus conversion step. Because going all the way down to 6 volts, as you can imagine, relative to 48 volt, the ratio being essentially 8 to 1. You have to square that. So the square of 8 is 64x. So the position of changing power distribution next to the point of load down to 6 volts is fundamentally challenged by the extreme inefficiency of distributing any amount of significant power at six volts. You can only go short distances and retain some level of efficiency. But to some extent, that's incompatible with an undervolt bus not being safe, right? Because it can give rise to hazards. So there's a lot of challenges with that whole concept.
And fundamentally, it's is a change in direction away from where the forward should be, which is at the point of load with respect to vertical power delivery. That's where the core challenge technically resides. And going off and trying to figure out how to save a few points out of 800 volts particularly when you combine that with a step all the way down to six volts is, in my opinion, a bad idea. But time will tell. And by the way, Vigo has provided technology other than the volt. We did a lot of pioneering developments with respect to bus conversion from 800 volt. And should that be successful to any degree, there's going to be issues with respect to IP there too. But in terms of your question as to what we expect to happen with that, we expect it to move forward, but we think it's a diversion from the real challenge, which is at the point of load. Any particular points of note with respect to vertical power delivery?
John Tenwanting (CJS Securities): Got it. Very helpful. Thank you, Patricio. Good luck.
John Dillon (D&B Capital):
Our next question comes from the line of John Dillon with D&B Capital. Your line is now open. Hi. Yes, guys. First of all, congratulations, especially on the bookings. Looks really good. Hey, I just wanted to go back to capacity for a minute. I want to make sure my numbers are right. If I heard correctly, you've got about a billion in capacity in your current FAB. You can add another half a billion. But on top of that, you have BRICS. And I would guess your BRICS would be at least 250 million. So am I right in assuming that your capacity with this expansion in the current area is about 1.75 billion?
Management: No. So the BRICS are part of it. I don't think they're quite at the level of 250. And, you know, as we've been saying for quite some time, you know, before too long, they're practically irrelevant. We shouldn't be thinking about breaks. And in effect, part of our strategy with respect to the expansion or capacity of Federal Street is to minimize the footprint taken up by legacy products that don't have the growth opportunity of advanced products, in particular second-gen VPD. So the number I quoted earlier is a step up in our capacity plan for Federal Street from one to one and a half billion. That's an all-inclusive number. Now, that all-inclusive number could potentially go further up but it wouldn't be because of the big contribution. It would be because of more opportunity for a special capacity of advanced products.
John Dillon (D&B Capital): Got it. So you see you could get above $1.5 billion. Excellent.
Management: Yes. We feel comfortable with a $1.5 billion target at this point in time, and again, the same process that has led us to identify opportunities to set capacity up measured in revenues per year from one to one and a half billion may have yet some further opportunity. Again, the logic behind it is to give ourselves more runway with respect to the next set of steps which include a variety of strategic choices ranging from the second FAB to alternate sourcing.
John Dillon (D&B Capital): Excellent. And with this expansion capacity, will you be able to satisfy the OEM and the hyperscaler customers you talked about in Q3 that came to you back in Q3 conference call? You mentioned those two. And I'm wondering if this expansion capacity will be able to satisfy them.
Management: Yes. Excellent. Thank you. I'll get back in the queue.
Richard Shannon (Craig Callum Capital Group, LLC):
Our next question comes from the line of Richard Shannon with Craig Callum Capital Group, LLC. Well, hi, guys. Thanks for letting me ask a couple of questions. I guess my first is a simple one here. The backlog has risen very nice, I think 70% sequentially. If you could characterize the sources of that increase here, whether it's from the lead VPD customer or anyone else in the kind of high-performance computing space and all other markets, if you could characterize between those three, that would be helpful. Thanks.
Management: Yeah. Hi, Richard. It's Phil. So in high performance compute, yeah, it was the lead customer and the hyperscaler customers that we have. But we also saw some really good lift in industrial and the defense aerospace markets, as I commented. It was really strength across the board, you know, broad markets as well as in high performance compute with a few lead customers.
Richard Shannon (Craig Callum Capital Group, LLC): Okay, great. Thanks for that. My follow-on question is, and apologies if I missed something, I had a couple interruptions here, but wondering if you could discuss the engagement or even design win status with follow-on, you know, VPD customers here. Sounds like, if I heard correctly, you're talking about strategic reservations on either capacity in the first FAB or the proposed second one here. Wondering if you can discuss the dynamics around those follow-on customers.
Management: So I suggested earlier, Richard, we're very much focused on competing readiness with respect to starting a generational change with a lead customer and with some other opportunities relating to that. I guess a way to think about this is that, in spite of the capacity expansion that we are pursuing, we see ourselves being essentially sold out in terms of capacity for the foreseeable future. And that gives us... the opportunity to be very selective with respect to new engagements in terms of their strategic significance and alignment of interests for the medium to long term. So in a way analogous to the comments I made earlier regarding expansion of capacity coming out of federal seat, first of all, giving us more time and opportunity with respect to, you know, parallel initiatives. On the front end of the business, just like the back end of the business, the fact that we're going to be enjoying strong bookings and strong backlog, and we have a near-term capacity nearly sold out, gives us an opportunity to align ourselves with the right applications and the right customers going forward. So we don't have to feel a sense of urgency because of where we stand in terms of the demand side.
Quinn Bolton (Needham & Company):
Thank you.
Our next question is a follow-up from Quinn Bolton with Needham & Company. Your line is now open. Hey, guys. Thanks for the follow-up questions. Patricio, just a quick clarification on the capacity expansion in Andover. When would you expect to reach that $1.5 billion of capacity? Is that end of 26? Is it going to take until sometime in 2027? And then I've got a follow-up.
Management: Well, so I don't think we want to be that specific at this point in time. As I'm sure you know, because of changing circumstances, we achieved the necessary comfort level to provide guidance for revenues for this year. But as we get past that, there are still so many different scenarios that it would be unwise to become very specific. Beyond saying that we have a plan to step up the capacity further, and we believe there is the market demand to use that expanded capacity as we get into 27 and beyond.
Quinn Bolton (Needham & Company): Got it. Okay, that's understandable. And then I just wanted to come back. I think, Phil, it was Phil that mentioned on the second-gen VPD, your solutions are one and a half millimeters high. I just wanted to clarify that. And if that's the case, I guess at the recent APEC conference, there were a ton of presentations on vertical power with folks like NVIDIA and Google asking suppliers to hit three millimeters or below. It sounds like you may be well below that threshold already. And so just wondering if you can talk about the interest you're seeing on the VPT products, because it does sound like you may have a major advantage in package height versus the competition.
Management: We do. And actually, it is even bigger than you might think for reasons I'm going to explain in a moment. It's not just that our solution is one and a half millimeter thin, but as Phil pointed out in his prepared remarks, it's that combined with the fact that our solution provides 40x current multiplications. And it does all of that with 3 amps per square millimeter current density. You need to really, in order to assess the figure of merit of a technology, you need to look at these three elements in combination. You can't just look at one. As an example, so-called integrated voltage regulators, IVRs, they can be even thinner than 1.5 millimeter, but they don't provide any meaningful current multiplication. They only step up the current by 2x, which is, practically speaking, useless in terms of efficient power delivery to the point of load. Because in order to deliver, let's say, 0.6, 0.7 volt, 2,000 amp, that would require a 1,000 amp feed, which is obviously extremely problematic. So it's not just thickness, it's thinness combined with current density and, most importantly, current multiplication. Because in order to have a VPD solution that is capable of supporting a wafer scale or other kinds of advanced compute capabilities, you really need the combination of all these elements, not just one of them.
Quinn Bolton (Needham & Company): Understood. Thank you, Patricio. Thank you.
John Tenwanting (CJS Securities): Our next follow-up comes from the line of John Tenwanting with CJS Security. His line is now open. Hi. Thanks for the follow-up. Jim, can you touch on the taxes in the quarter? What went into that tax rate, and then what rate can we expect going forward? And then I have a follow-up after that.
Management: Yeah, so when we closed fourth quarter, we reversed a significant portion of the valuation allowance, and our expectation was more or less that we would be in the range of 20% in terms of an effective tax rate. What happened, John, in Q1 is that there was a substantial pent-up demand in terms of stock options that got exercised that a nice spread between strike and exercise price. And that's a tax benefit for us. So that's a, that's a one time discreet item, um, that doesn't get baked into the effective tax rate. And our feeling is that going forward, you know, there'll still be that effect, which is a positive effect for us, but, um, but planning can be more in the line with a 20% kind of a rate.
John Tenwanting (CJS Securities): Perfect. Thank you. And then Patricio, could you talk a little bit more or maybe feel just about the demand from the defense? and semi-test businesses, what percentage of revenue are they, number one? And number two, just with regards to defense piece specifically, are you able to meet the critical defense needs that the U.S. has with the upcoming capacity constraints that you're modeling?
Management: I'm sorry, some of your words are metal. Can you repeat the first question?
John Tenwanting (CJS Securities): Yeah, first, the percentage of semi-test and defense in the revenue today, and second, can you meet defense demand as it grows? you know, given that it's critical, given the capacity constraints that you're modeling going forward.
Management: Yes. So, John, as Phil, we don't break those things out, but the answer to
the question is we can meet the needs of the defense market with the capacity that we have.
John Tenwanting (CJS Securities): Okay, great. Thank you.
John Dillon (D&B Capital): Our next follow-up comes from the line of John Dillon with D&B Capital. Your line is now open. Thank you. Hi, yeah, I was just wondering, does ViCore have any vertical power licensing agreements that will generate revenue this year?
Management: So there may be opportunity of alternate sourcing of the second gen VPD technology, but this is not something that we're prepared to talk about today.
John Dillon (D&B Capital): Okay. And, Phil, on the bookings, can we assume a bookings run rate of what we saw today for the rest of the year?
Management: So, John, I think the bookings are going to be well above one, like Patricio talked about. But, you know, they're lumpy, so I don't want to be pegged to a particular ratio. But they're very strong going into Q2, and we'll say well above one.
John Dillon (D&B Capital): Thank you very much.
Don McKenna (DB McKenna and Company Inc.):
Our next question comes from the line of Don McKenna with DB McKenna and Company Inc. Your line is now open. Yeah, Phil, could you give us an idea of what percentage of the backlog is attributable to your lead customer?
Management: Again, we don't break that out. They're an important lead customer for us, but they're not, you know, the only major one. We've got a hyperscaler and big customers across industrial and defense and aerospace that are ramping, as well as just the broad market. So it's just general strength right now that's really good that we're benefiting from.
Neil Gore (Shareholder): Okay, thank you.
Neil Gore (Shareholder): In the past, you said you expect that royalty income could grow to as much as 50% of product revenue. Do you still have that expectation?
Management: The expectation of the licensing as a percentage of product revenues, we've talked as much as 50%. The question was, can we Do we still hold to that? Yeah, we feel very good about a licensing practice. We are investing heavily in it. It would be investing in it at an escalating rate because we see that business as being both a high growth business in terms of its top line and needs to say, is nearly 100% margin in terms of profitability. We anticipate, as discussed in prior meetings, that there will be a time in the not-too-distant future when OEMs and hyperscalers will be vital with only perhaps rare exceptions. We see that dynamic progressing, and we think we're pretty close to a crossing of the chasm with respect to the industry wanting to be protected in terms of a license to enable power system technology from Weigel.
Neil Gore (Shareholder): Thank you. Do you expect that some of the other lawsuits that you have had for violating your patents, has anyone approached you to settle after the big settlement you received earlier last year?
Management: So we carried the first ITC case to a successful conclusion. And to be clear, that conclusion doesn't mean that there isn't ongoing opportunity relating to the first ITC case. In fact, there is an action pending a customs as we speak relating to that first exclusion order. While we're working with the case we brought earlier this year, for which the ADC once again chose to issue an investigation to get that to its final determination, which should result in a second exclusion order. And this may not be the end of the road. I mean, in Italy, we are saying that there is no two without three. So there's been two thus far. Don't be surprised if you see a third one. And so this, again, part of a very comprehensive campaign. You know, Weigel has been the pioneer in the power system industry, always very much in the forefront of very high power density and performance for nearly 40 years as a longstanding pioneer in the industry. We got into places well ahead of any competitor in scouting these new landscapes with respect to power distribution architecture, power conversion engines, control system, advanced power conversion components.
You know, we have consistently pursued an extensive... protection through many patents. And lo and behold, the industry, given demands in AI and with respect to other electronic systems, now is very much in need of those kinds of technologies that Viagra pioneers. So licensing is going to be an expanding portion of our business. a very significant one in its own right beyond our module maker through, again, unique FABs revenue capability.
Neil Gore (Shareholder): Okay, and next question on that. Are there any expenses affiliated with licensing revenue? Is it part of your SG&A perhaps? Any expenses associated with licensing revenue?
Management: Of course, the lease. Yes. So we have partnered with law firms that have a share of the interest in the outcome, you know, subject to caps and so on and so forth. So as we record the licensing income, we record the operating expense for the share of the proceeds from the litigation that led to the licensing deal owed to our partners.
Justin Clare (Ross Capital Partners): Thank you. Thank you.
Justin Clare (Ross Capital Partners):
Our next question is a follow-up from Justin Clare with Ross Capital Partners. Your line is now open. Hey, thanks for taking the follow-up. So this one here, so we did see a large transaction announcement between OpenAI and a wafer scale supplier last week. And just wondering against that backdrop, can you share how your visibility into demand has evolved over the last quarter? And then maybe if you could comment on the size of the opportunity you're seeing with your lead customer for vertical power and how that compares to the visibility you had last quarter.
Management: Well, I think we felt very strongly about a lead customer technology and their market opportunity. And frankly, for a number of years, I was confronted with a degree of skepticism by investment bankers and the like who didn't share the same level of confidence that Weigel had in a lead customer. And so that's been proven out to be the right expectation. We think they have a real opportunity technological advantage at least for a certain class of AI applications and that will translate into share market share growth and we believe substantial success in years to come and that's an opportunity for us to say as we have with the AI market in general.
Richard Shannon (Craig Hallam Capital Group): Appreciate it. Thank you.