Philip Davies

Thank you, Jim. Our Q3 bookings reflected continued strength in our industrial and aerospace and defense markets and temporary weakness in high-performance computing. Focusing on the high-performance computing market, we have successfully completed development of all the ASICs and semiconductor devices included in our first Gen 5 chipset, but its introduction was delayed because of an issue requiring a respin of one of the modules' printed circuit boards. This work has now been completed, and we will soon schedule VPD demo system meetings with lead customers.
Interest in our second-generation VPD for artificial intelligence and network processors is very high, partly because competitive VPD solutions using stacked modular assemblies lack the requisite current density, robustness, and cost effectiveness. Our Gen 5 current multipliers occupy one-third of the footprint and are three times thinner than first-generation stacked VPD solutions. Stacked multiphase VPD modules are challenged electrically, mechanically, thermally, and last but not least, from the IP perspective. The AI market has significant business opportunities for Vicor with 48-volt bus converters, Gen 5 VPD solutions, and OEM licensing.
Leading AI companies relying on Vicor's power system technology have licensed Vicor IP or are procuring modules directly from Vicor. As evidenced by a recent ITC initial determination, certain actors have been playing a game of Catch Me If You Can with copycat suppliers of infringing modules or discrete solutions. We are executing a comprehensive plan to enforce Vicor IP and protect the domestic industry from foreign theft of US intellectual property. In Q3, we introduced 5 new DC-to-DC converter power module families that utilized advanced packaging technologies from our new ChiP fab, featuring advances in control systems and components, enabling two to three times higher power density.
These are now being sampled to our top 100 customers and soon will be available to our broad customer base via our distribution partners, who will work with our global channel team targeting our top channel accounts across eight target market and application segments. We are beginning to see the results of our strategy to focus the majority of our resources on a set of 100 customers globally across four main markets. These customers will drive our revenue growth in the coming years to our $1 billion target and 65% gross margins. By focusing on the top 100, we are able to set resources, goals, and priorities to achieve higher levels of efficiency in delivering new products, production support, technical support, and exceeding customer expectations.
We are not 100% of the way there yet, but we are well on the way to achieving our operational excellence and customer centricity objectives by having our entire company aligned in achieving these objectives. The adoption of a 48-volt zonal architecture by automotive OEMs across Asia-Pacific and Europe is driving significant new opportunities for us, with lower-voltage fixed-ratio bus converters and regulated 48-volt DC-to-DC converter power modules. Our new Gen 5 product families, with their higher power density and lower cost, put Vicor in an excellent position to participate in higher-volume 48-volt zonal BEV and hybrid automobile platforms. These Gen 5 products were initially designed for our high-performance compute customers, but new automotive-grade versions will become available in Q1 of 2025.
With regards to automotive-grade capabilities, we were notified by the TUV that Vicor has met the requirements of the IATF 16949 standard. This is a critical milestone in our journey to full certification and building out our full automotive design and manufacturing capabilities to meet the needs of our automotive OEMs and Tier 1s. Thank you. And with that, we will now take your questions.

Question and Answer Session

Operator

(Operator Instructions) Quinn Bolton, Needham & Company.

Quinn Bolton

Congratulations on the nice September results. I wanted to ask first, obviously, you guys had a nice initial determination at the ITC against Delta. Can you give us an update just what have you seen from OEM customers or folks that may be currently using the Delta bus converter modules? Are you seeing increased interest in folks licensing your patents?
Or do you think that you're going to have to continue to pursue actions against folks using those modules in the courts?

Patrizio Vinciarelli

So we've seen from multiplicity of sources indications that Delta is telling these customers not to worry, they're going to have a workaround, they're going to sample it late this year, and they'll have it ready to, in effect, replace existing solutions by the time the exclusion order comes down. Some of these customers are skeptical of these expectations. Some of these customers realize that beyond technical challenges and potential issues with requalification, robustness, reliability, there are still significant legal challenges having to do with the feasibility of inventing around all of the asserted patents. And to be clear, what just came down is the first act of a number of acts that are yet to develop.
And to get to the point, the ability of companies that are playing a game of Catch Me If You Can, to escape the minefield of IP that Vicor has planted in connection with decades of innovation across the entire high-density, high-performance, our system infrastructure, 48-volts, the point of load and elsewhere. That's a very tall order that I doubt very much our competitors are going to be able to achieve. So customers that rely on their expectations are likely to be experiencing a variety of challenges with respect to redesign, requalification and ongoing issues for years to come.

Quinn Bolton

And I guess, Patrizio, in that game of Catch Me If You Can, are you seeing Delta customers looking to switch to, say, modules from other vendors such as Flex or Monolithic Power or others? Or do you think to the extent that they switch to modules from those vendors that they may still be subject to the exclusion order, assuming that you get that in the final determination?

Patrizio Vinciarelli

Again, our action is the one for which we just received the initial examination is the first of a series of actions. And generally speaking, the issues with respect to intellectual property, they're now limited to the Delta modules.

Quinn Bolton

Got it. And if I could squeeze in just one more on the Gen 5 sampling. It sounds like you said you've kind of respun one of the ASICs or one of the chips in that chipset and you're proceeding now to schedule samples and meetings with the customers. Can you give us maybe then an updated timeline outside of perhaps one lead customer for Gen 5? When would you expect Gen 5 products to potentially be adopted and ship in volume in the HPC market?
Is that now kind of a late 2025 timeline? Do you think you could ramp a program before that?

Patrizio Vinciarelli

So just to be clear, all of the ASICs and all of the unique semiconductors have been working fine and they've been fully characterized. So we have completed the task with respect to those. As Phil mentioned earlier, the issue that settles back by a number of weeks is an issue with the PC board in one of the current multipliers that had to be spun a couple of times to address issues at the PC board level. So the issues have not had to do with the more critical, if you will, ASICs or power semiconductors.
Those are in place for the first wave of 5G. We have all those components. We've had them for some time. In terms of next steps, we will start with one key customer. And if things proceed according to expectations, we're going to be shipping initial quantities of 5G VPD systems components to the customer in the next couple of months.

Quinn Bolton

Got it. And thank you, Patrizio, for clarifying it was a PCB issue that needed to be reworked rather than an ASIC. Sorry to have missed that.

Patrizio Vinciarelli

Yes.

Operator

Jon Tanwanteng, CJS Securities.

Jon Tanwanteng

And again, congratulations on Q3. Just a follow-up on the VPD product. Are those initial shipments you're talking about for testing and development for the customer? Or are these production units destined for a product to be sold?

Patrizio Vinciarelli

So the initial set of units in the hundreds, that's for initial customer bring up PowerUP production is a first half of '25 event based on current schedule.

Jon Tanwanteng

Got it. And you would be getting orders for those products sometime in the first half if things go according to plan. Is that correct?

Patrizio Vinciarelli

Well, we've had orders for this product, which we're going to begin to fill. There's going to be additional orders once we get past the system-level validation of the customer.

Jon Tanwanteng

Understood. And just a quick question on the orders in the quarter and the way your revenues trended sequentially. I was just wondering what drove the strength there? And kind of what came into the quarter? Was anything pulled in or anything like that? Just if you could characterize the mix or the strength in any way, shape or form, that would be helpful.

Philip Davies

Yes, John, this is Phil. I mentioned that we had continued strength. We had it in Q2 into Q3 of our industrial, aerospace, and defense markets. I mentioned temporary weakness in high-performance compute because orders there are typically very lumpy. So we see those come in and then disappear for a quarter and come back again. So that's where we had a little bit of weakness in hitting the one-plus book-to-bill ratio.

Operator

Richard Shannon, Craig-Hallum.

Richard Shannon

I guess my first question is looking at your Gen 5 VPD product here. In the context of Phil quantifying the pipeline for the automotive business last quarter, maybe if you can characterize or even quantify what the pipeline looks like for this product. You've talked about an initial customer you're shipping to. Do you have any sense of even quantifying how much that looks like right now?

Philip Davies

So Richard, it's Phil. We had, I think, a little discussion on this about rebuilding our HPC pipeline from the past highs of the big GPU acceleration system that we were included in. So it's a rebuild, and it's across a number of fronts. One is obviously the VPD push with Gen 5. And as we mentioned, the interest in that is very, very high for a number of reasons I articulated.

Operator

Don McKenna, D.B. McKenna & Company.

Donald McKenna

My question goes back to the revenue side as well. And with revenues up, the way I look at it is $7.3 million, but the (technical difficulty).

Philip Davies

Basically, it's difference between orders during the quarter and the shipments. That's the net number.

Patrizio Vinciarelli

So another way of saying it is we shipped 94 and we booked about 92.

Philip Davies

Yes. It's just that simple. I mean it's the shipments deliverable next year and shipments are obviously --.

Operator

Jon Tanwanteng, CJS Securities.

Jon Tanwanteng

Actually, I wanted to follow up on that last point. Did the licensing increase sequentially at all in the quarter?

Philip Davies

Yes. So yes, the licensing increased as did product revenue was relatively flat, and there was increase in royalty revenue in the quarter.

Jon Tanwanteng

Got it. And then, Phil, just maybe a little bit more on the fifth-gen products. Outside of the GPU, are you seeing broader interest as well? I'm talking about network processors, CPUs, other forms of silicon. Is that things you're concentrating on as well, or is the leading edge AI where most of the meat is?

Philip Davies

Network processors are very important, Jon. So that's part of the initial mix. I mean this Gen 5 and Patrizio can talk about this better than me, but this Gen 5 technology is really going to enable a new suite of products also into our ATE customer base, factorized power there as well across aerospace and defense for radar systems. We're looking at this maybe sometime in the next three to five years for potentially space applications and other markets as well. So the Gen 5 technology is really going to be a spearhead for us across, I would think, the four main markets that we focus on.

Operator

Quinn Bolton, Needham & Company.

Quinn Bolton

I wanted to follow up. Last quarter, you talked about sort of margins being under pressure from a legacy HPC program that had kind of come back in higher volume. And it looked like it likely continued here in the September quarter. I wondered if you could just confirm that. And then I know you're not giving guidance top line or margins for next quarter, but does that legacy HPC volume continue into the December quarter? Or does that start to roll off and you might see a better mix shift product mix in Q4?

Patrizio Vinciarelli

So we're expecting improvements partly due to your point to the fact that the product mix issue that we referenced with the legacy product, which we discussed in the last quarterly call was ongoing in Q3. It will be ongoing for part of Q4. But for all of Q4, the effect will be somewhat diminished overall. There are other factors that should help us with respect to improving margins.

Quinn Bolton

Got it. And then I guess, looking at the licensing or the royalty revenue stream, it's been up consecutively now for several quarters. As you look into the end of the year in 2025, obviously, customers across the AI market are moving to new generation GPUs and ASICs and accelerators. I guess as you look at your licensees' product road map, is there anything that changes with their product road map that might reduce the royalties they pay or the royalty rate? Or would you expect that royalty to continue to trend with sort of unit shipments at your OEM licensee?

Patrizio Vinciarelli

We expect it to continue to trend up with volume based on continued use of our technology either in module form or in terms of discrete solutions.

Operator

Jon Gruber, Lagunitas Investments.

Jon Gruber

You seem very positive on the prospects of Gen 5. When do you think Gen 5 revenue will surpass 10% of quarterly revenue?

Patrizio Vinciarelli

Well, so just to be clear, we are positive about Gen 5 because it represents a revolution with respect to point-of-load solutions. And I'm not taking the word revolution lightly, so I'll back it up with numbers. So the competition has to infringe a number of Vicor patents to deliver about 1.6 amps per square millimeter. We can deliver initially three and before too long, more than that in a solution that not only takes up a lot less footprint, but as suggested earlier by Phil, it's also a lot thinner, like 1.5 millimeter thin as opposed to about three times that.
So if you combine the footprint advantage, which is, to begin with, three times and the advantage in terms of thickness, overall volumetric density and weight, it's nearly an order of magnitude advantage in terms of overall density, volumetric density. So those are the foundations for our optimism and high expectations with respect to 5G. It's really revolutionary technology in every respect in terms of its control systems, packaging technology, ability to deliver solutions with much higher efficiency, much higher bandwidth, much lower noise, much improved signal integrity, all of which are critical to next-generation AI systems.

Jon Gruber

That's great. But then when does that translate into serious revenue for the company?

Patrizio Vinciarelli

As Phil suggested, we are going to start ramping with a lead customer. It will take some time, the better part of next year, to get further with other customers. We've been, frankly, taking it one step at a time. We don't want to be out there in front of multi-busier customers prematurely. And because of that, beyond our lead customers, we have been playing it very close to the vest that we're going to transition to a different phase in a few months and we expect to get a good deal of traction as we get further into '25.

Operator

Alan Hicks, Ainsley Capital Management.

Alan Hicks

Back on the question, you said that product sales were flat, but royalties were up. Was that just on Advanced Product sales were flat or overall?

James Schmidt

No, I quoted the Advanced Product sales in the prepared remarks as well as BRICK. So there was an increase in royalty revenue sequentially. And then the Advanced and BRICK split is what I mentioned earlier in the prepared remarks. Advanced Products does include the royalty component.

Alan Hicks

Okay. So that suggests Advanced Product sales were down a little bit, but royalties back to even or up from that overall?

James Schmidt

Sounds about right. Yes.

Alan Hicks

And then the second question is, are all your Advanced Products now being produced in your new factory?

Patrizio Vinciarelli

Yes.

Alan Hicks

So that's going well. Are any problems, hangups, things need to tweak, that kind of thing?

Patrizio Vinciarelli

Well, in a factory, there's never a time when there is some issue or another issue. But generally speaking, we feel very good about the capability we put in place. This is the first foundry for power components in the world. And so far, so good. We're happy with the progress we've made. If we go back 1.5 years ago, we had serious challenges in terms of capacity, consistency with outside vendors.
And the vertical integration we put in place has begun to pay off for itself in terms of giving us much shorter cycle time, much greater predictability. We can now complete all the packaging processes, what we call 3D metal interconnect, in, if necessary, two weeks. It used to take us three times, four times as long 1.5 years ago. So the benefits of vertical integration, automation with respect to chip foundry is multifold.
Its short cycle time, its scalability with respect to capacity, and ultimately, its cost effectiveness as we get to absorb the fixed costs that are now reflected in our financial statements, right, that are associated with the equipment we deployed and the people we've hired in order to execute on this vertical integration. So as we progress into a phase where we absorb that capacity, we're going to see a strong contribution to margins.

Alan Hicks

Okay. And I wanted to ask about the chip packaging converters housed in the package. I know you announced it over 10 years ago, and it seems like it's evolved quite a bit. Are you producing those whole panels? I think there's like 40 of them on a panel, or you can cut them up into modules? And does anybody else have anything like that? And what would you say is your --.

Patrizio Vinciarelli

No. Nobody can try to infringing our IP. And if they do, they should understand by now that there's going to be consequences, right? So no, this is a unique capability that Vicor pioneered and put in place. And we're quite proud of it. And to your point, it gives us the ability to manufacture very high-density components with constant denominator panels, which are the counterpart to wafers in a semiconductor foundry.
They are rectangular as opposed to being circular. But they share many of the attributes of the kinds of efficient process that goes on in semiconductor fabs.

Alan Hicks

So would you say it's like a very tiny brick, each one of these modules?

Patrizio Vinciarelli

I didn't catch the word.

James Schmidt

A tiny brick--.

Alan Hicks

It's a very tiny brick. Was that what you'd say?

James Schmidt

A tiny brick, it is.

Patrizio Vinciarelli

Well, no, I think that's not a good analogy because brick were the power component paradigm that Vicor invented at the very beginning of the power module industry. And it's dramatically opposed to what we're doing with converters housing packages. So bricks are, by their nature, made in a dedicated form factor, which is specific to the brick. So the processes are not scalable, not nearly as efficient.
With converters out in package, to your earlier point, irrespective of what the particular type of device happens to be, and it can be an 800-amp point-of-load turn multiplier in a 28-millimeter by 7.5-millimeter wide package, or it can be a 40-kilowatt fast-charging bus converters for automotive. And these are extreme opposites in effect in the realm of power products that our technology supports. But irrespective of what the end market application is or what the nature of the power system required happens to be, they are built in our foundry using exactly the same processes, the same equipment, the same three-dimensional integration.

Alan Hicks

Well, it sounds very impressive. So congratulations on everything you're doing.

Operator

Richard Shannon, Craig-Hallum.

Richard Shannon

Let me ask a follow-up here. Patrizio, I'd love to get your sense from your initial customers you're engaged with on the Gen 5 VPD. What's their view of the supply chain that you have here? Do they view it as well-tested enough to run real volumes here? Do you expect with these initial wins to be sole-sourced?
Do you think they'll be shared until they get more confidence? Maybe just kind of help us understand the current state of view of that, please.

Patrizio Vinciarelli

So I think in the foreseeable future, as I look out, let's say, over the next year, 1.5 years, the customers who are engaged for high-performance solutions for very high-performance AI, they recognize that the Vicor foundry, the first foundry is the foundry for these products for that time frame. As we look beyond that, we expect, as we mentioned in the past, there's going to be a second foundry and a third foundry. And that will bring about additional capacity and additional robustness to the supply chain. But we view the existing capability at Federal seat as being quite robust.

Operator

(Operator Instructions) James Lieberman, American Trust Investment Services.

James Lieberman

It's good to see the progress you're making. I wonder, is there a way to understand the next several legal steps, not that you would comment on them, but as a process in terms of as things are playing out? And can the ITC begin to put sanctions in place even before all of the appeals processes play out? Is there any way to understand that?

Patrizio Vinciarelli

So I'm not sure I captured everything you said. It was a question about what might happen with the ITC, and correct me if I'm going off in the wrong direction in terms of answering your question. But just in terms of explaining the process there, if that's the question.

James Lieberman

Yes, correct. That is the question, yes.

Patrizio Vinciarelli

So what happened a few weeks ago, a couple of weeks ago is that the ALJ, the administrative law judge, that has presided over the case issued its initial determination. The process involves that determination being reviewed by the commission. before being subject to a presidential review process before the exclusion order becomes operative. But even before exclusion order becomes operative, during the presidential review period, there is a bond that infringers have to post in order to be able to import into the country infringing products. And that bond in the case of computing systems that are affected by the infringement was set by the ALJ at 100% of their value.
So the initial determination came down about a week ahead of schedule at the end of September. It was due in the first week of October. The commission is due to render its final determination by February 3. And that's when an exclusion order we would expect will issue subject to presidential review. But that's when the bond will go into effect.

Operator

Don McKenna, D.B. McKenna & Company.

Donald McKenna

Now that the new facility is completely operational, I'm wondering what your plans are to invite the investment community to see it.

Patrizio Vinciarelli

No immediate plans. But that's a good question, and we'll take it under advisement. But we have a busy calendar over the next few months. By the way, we are completing installation of a new MRP system, SAP. And that's going to become operative in the last week of the year. So we have a lot of things going on to bring about the operational excellence that Phil has talked about. And that's going to keep us quite busy for a little while.

James Schmidt

Yes. We also have lots of customers still coming through the facility, and we expect a lot more as we roll out Gen 5. So we'll certainly keep it in front of us.

Donald McKenna

We could tag along with some of those customers.

Patrizio Vinciarelli

And maybe a few competitors as well. Why not?

Donald McKenna

All right. Just wanted to let you know we're still interested.

Patrizio Vinciarelli

Okay. I'm sure lots of people are.

James Schmidt

Thank you.

Operator

And with that, I will conclude the Q&A session and the program for today. Thank you all who participated. You may now disconnect.

Patrizio Vinciarelli

Thank you.

James Schmidt

Thank you.