Advanced Energy Industries Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to Advanced Energy's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Edwin Mok, Marketing and Investor Relations. Mr. Mok, you may now begin.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy Third Quarter 2023 Earnings Conference Call. With me today are Steve Kelly, our President and CEO and Paul Odom, our Executive Vice President and CFO. Before I begin, I'd like to mention that we will be participating in several investor conferences.

Speaker 1

If you have not seen our earnings press release and presentation, You can find them on our website at ir.advancedenergy.com. Let me remind you that today's Call contains forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward looking statements are based on management's estimates as of today, October 31, 2023, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today Should not be interpreted as guidance.

Speaker 1

On today's call, our financial results are presented on a non GAAP financial basis unless otherwise specified. Exclude from our non GAAP results are stock based compensation, amortization, acquisition related costs, facility expansion and related costs, Restructuring charges and unrealized foreign exchange gains or losses. A detailed reconciliation between GAAP and non GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Hells.

Speaker 2

Thanks, Edwin, and thanks to everyone for joining the call today. We delivered solid results in the 3rd quarter with earnings at the high end of our guidance range on slightly lower revenue. We delivered record operating cash flow of $73,000,000 benefiting from improved operating margin, Effective inventory control measures and execution of our cost control initiatives. In a more challenging demand environment, we continue to deliver solid profitability and cash flow. Our strong financial performance through the business cycle gives us the freedom to invest in new products and technologies as well as improvements in manufacturing efficiency.

Speaker 2

We expect that these investments We continue to make great progress on the new product front. Year to date, we have launched 19 new products across our market. In addition, We have expanded our quick turn customization activity, which enables us to quickly adapt our products to the particular needs of our customers. In our targeted markets, we are experiencing strong design win momentum in a variety of high value applications. We continue to expect a record number of design wins in 2023, Building a solid foundation for growth.

Speaker 2

To improve our operational efficiency, We are working to optimize our factory footprint with the goal of consolidating nearly all of our manufacturing into highly efficient Large Scale Factories. As part of that ongoing effort, we are closing 2 smaller factories in the current quarter.

Speaker 3

This is

Speaker 2

in addition to the Shenzhen factory closure we completed last December. Last month, we broke ground for our new flagship factory in Thailand. Construction will start next year, and we expect the facility to ramp in 2025. This new Thailand factory, Together with our large factories in the Philippines, Malaysia and Mexico, we'll provide the capacity to meet our future needs. Supply chain issues continue to abate and are no longer a significant constraint on revenue.

Speaker 2

There are still components with very long lead times, such as power MOSFETs, but we think that supply will catch up with demand in the coming months. Now I'll provide further color on each of our markets. In semiconductor, 3rd quarter revenue increased sequentially to $185,000,000 We saw increased demand for RF products Used in etch and deposition applications. In addition, we achieved record revenue For our high voltage products, which are used primarily in ion implanters. Service revenue decreased sequentially due to lower fab utilization.

Speaker 2

For the year 2023, however, We expect to set a service revenue record based on our larger installed base and a richer menu of value added services. We continue to work closely with our key customers to design in our next generation Everest And EVOS platforms. We have received numerous orders for these recently launched platforms and are working hard to satisfy the near term demands of our customers. We believe that Everest and Evos We'll enable our customers to more effectively overcome the technical challenges of sub-two nanometer processes. These new technology platforms have the potential to drive meaningful revenue growth for many years to come.

Speaker 2

Moving to Industrial and Medical. 3rd quarter revenue was $115,000,000 Down sequentially following several record quarters. Revenue came in slightly below our plan Due primarily to softer market conditions late in the quarter, we launched 5 new products into the industrial medical market, In the industrial market, we secured notable design wins across robotics, factory automation And Thin Film Manufacturing Application. Our medical design and activity was particularly strong in the 3rd quarter with significant wins in diagnostic and therapeutic application. In August, we launched the new Advanced Energy website.

Speaker 2

Creating the content of this website was a company wide effort, and we are pleased with the quality We expect the new website will enable us to reach a much wider cross section In early 2024, We will add e commerce capability to the website, providing another way for our customers to order and rapidly evaluate our products. Overall, we believe that our design win pipeline and improved go to market strategy In Data Center Computing, 3rd quarter revenue increased sequentially to $68,000,000 as expected. Strong revenue from the ramp of a hyperscale design win for AI applications offset lower sales to enterprise customers. Telecom and networking revenue decreased sequentially to $41,000,000 in line with our expectation. Now let me share a few closing thoughts.

Speaker 2

At the beginning of 2023, we expected that semiconductor revenues would be down Year on year, that the rest of our business will be flat to up. We also said that our semiconductor business would trough in the 2nd quarter, Largely how things have played out in 2023, despite a softer macroeconomic environment in the second half of the year. Looking forward, we will continue to move full speed ahead, executing the strategy we first articulated 2 years ago. New products and technologies, more aggressive go to market strategy and improved manufacturing efficiency will remain our primary areas of focus. With our recently completed convertible note offering, We have secured low cost financing, which could potentially accelerate our growth.

Speaker 2

We continue to look for M and A opportunities, which makes strategic and financial sense for the company. Leveraging the bra offering of highly differentiated products, A record number of design wins, improved manufacturing efficiency and a strong balance sheet, We believe that Advanced Energy is well positioned to grow faster than our markets. Paul will now provide detailed financial information.

Speaker 4

Thank you, Steve, and good afternoon, everyone. Q3 was a quarter of solid execution with earnings that came in at the high end of our guidance on Slightly lower revenue. We saw some demand softening late in the quarter, largely due to macroeconomic factors. However, actions we took to improve our operations and control discretionary spending enabled us to deliver sequentially higher gross And operating margins. Together with higher interest income and lower taxes, earnings increased 16% sequentially on 1% lower revenue.

Speaker 4

Importantly, operating cash flow was at the highest level ever for the company. Finally, with shortened lead times, customers are adjusting their order patterns and our backlog came down to 514,000,000 We continue to expect our backlog will settle to a level of $400,000,000 to $500,000,000 by the end of the current quarter. Overall, despite a softer demand environment, we believe the year is shaping up as we had expected. We are focused on driving new product activity and improving our cost structure while preparing for the next upturn. Now let's review our financial results in more detail.

Speaker 4

Total revenue was $410,000,000 down 1% sequentially and 21% from our peak quarter a year ago. Revenue in the semiconductor market was $185,000,000 up 7% quarter over quarter, consistent with our view that Q2 was a near term bottom. Revenue in the Industrial and Medical market was $115,000,000 down 10% from last quarter and 4% year over year. Following several quarters of record results, Industrial and Medical saw some softening in demand late in the quarter. Looking forward, we expect incremental revenues from prior design wins to largely offset the impact of a sluggish macroeconomic environment in Q4.

Speaker 4

Data center computing revenue was up 16% sequentially to $68,000,000 Due to the ramp of a hyperscale customer for AI applications, sales declined 22% year over year due to the cyclical Telecom and networking revenue at $41,000,000 was down 26% sequentially and 3% year over year as we fulfilled overdue backlog. Q3 gross margin was 36.1%, up 50 basis points from Q2 on lower volume as we benefited from improved mix and lower material costs. Premiums we paid for critical components continued to taper As costs from prior quarters rolled through inventory to the P and L, we expect to see the full benefits of lower premiums in the first half of twenty twenty four. We also continue to take actions to optimize our operations footprint and manufacturing efficiency. Consolidating capacity into larger, more efficient factories should contribute to higher gross margins over the course of 2024.

Speaker 4

Operating expenses were $97,300,000 down from last quarter. OpEx was below our guidance As we managed our cost structure and controlled discretionary spending, Q3 operating margin was 12.4%, Up 50 basis points sequentially. Depreciation was $9,700,000 and our adjusted EBITDA was $61,000,000 Non GAAP other income was $1,300,000 due to higher net interest income, partially offset by foreign exchange losses. Looking forward, we expect our non GAAP other income to be in the range of $3,000,000 to $3,500,000 for the next few quarters, We are on track to our plan and expect to see the benefits of our actions translating to better margins Over the course of 2024. Consistent with this plan, we recognized $5,000,000 in restructuring costs in Q3 and expect to incur an additional $5,000,000 to $8,000,000 in the 4th quarter.

Speaker 4

Our non GAAP tax rate was 7.2%, below our Q3 target of 17% due to discrete benefits related to tax strategies we implemented this quarter to lower our tax rate. As a result of these strategies, we are now modeling our Q4 and 2024 GAAP and non GAAP tax rate at around 16%. 3rd quarter EPS of $1.28 was at the high end of our guidance of $1.13 and above Q2 of 1 $11 But down from $2.12 a year ago. If you apply our prior target tax rate of 17%, Q3 EPS would have been $1.15 Turning now to the balance sheet. Total cash and marketable At the end of the Q3 were $986,000,000 and included approximately $482,000,000 In net proceeds from transactions associated with our 2.5% convertible senior notes offering that we completed in September.

Speaker 4

Operating cash flow from continuing operations was a record $72,700,000 Excluding the convertible offering and related transactions, Cash increased from $455,000,000 to $504,000,000 Net cash at the end of the 3rd quarter was $66,000,000 Inventory decreased $28,000,000 Down 7% sequentially and 11% year over year as actions to monetize on hand inventory started to contribute to cash flow. As a result, inventory days decreased from 132 in Q2 to 125 in Q3 And turns improved from 2.7 times to 2.9 times. Days payable decreased 2 days sequentially to 48 days NDSO increased 3 days to 59 days. Net working capital was 136 days. CapEx was $13,000,000 or 3.2 percent of sales and below our near term target of approximately 4%.

Speaker 4

We continue to expect our CapEx for this quarter and the next year to remain around 4% of sales, which includes cost of our manufacturing consolidation plan and the investment in the new Thailand factory. During the quarter, We made debt principal payments of $5,000,000 and paid $3,800,000 in dividends. Finally, As part of the convertible note offering, we used $40,000,000 to repurchase 370,000 shares of our common stock. Now let's turn to our guidance. Consistent with our commentary from last quarter, we expect that second half semiconductor revenue will be flat to up For our non semiconductor markets in aggregate, we continue to expect 2023 revenue to grow slightly from last year, With low double digit growth in Industrial and Medical and Telecom and Networking, offset by cyclical weakness in data center.

Speaker 4

However, looking forward, we expect telecom and networking revenues to continue to normalize towards $30,000,000 a quarter over the next couple of quarters. As a result, we are forecasting our Q4 revenue at $405,000,000 plus or minus $15,000,000 We expect Q4 gross margin to be similar to Q3 on slightly lower volume. We expect Q4 operating expenses to be about flat with Q3 with timing of investments in new products offset by other cost reduction. Based on a tax rate of 16%, we expect Q4 non GAAP earnings per share to be $1.15 plus or minus 0.20 dollars Let me make a few concluding comments. Overall, we are executing our plans for 2023.

Speaker 4

Our diversification strategy is enabling us to mitigate the impact of a sluggish macroeconomic environment and ongoing corrections in some

Operator

of our

Speaker 4

markets. We continue to expect to perform better than in our markets and significantly better than in previous semiconductor cycles. Looking forward to 2024, we expect semiconductor revenues to continue to bounce around these levels for the next few quarters, but are prepared for upside if the market recovers sooner. We expect performance in our other markets to be paced by macroeconomic factors, Timing of customer orders in hyperscale and normalization of revenue levels in telecom and networking, all partially offset by In the meantime, we are focused on improving gross and operating margins, While investing in critical programs to prepare for the next cyclical upturn, we believe our actions to control costs, Improve operational efficiency and shift mix towards higher margin products position the company to reach our long term gross margin target of over 40%. Finally, with solid operating cash flow and a strong cash position, we have financial flexibility and multiple paths to create value for our shareholders.

Speaker 4

With that, let's take your questions. Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer One moment please while we poll for questions. Thank you. And our first question today comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question.

Speaker 5

Hi, good afternoon. I wanted to pursue The areas of the INM business where you've seen some softness, I wonder if you could just maybe expand on that. And then Conversely, just as you talk about some of the recent design win activity you've had there, where you see Some pickup potentially offsetting some of this weakness?

Speaker 2

Yes, Jim, this is Steve. Yes, we saw a little bit of weakness in I and M towards the end of the quarter.

Operator

We

Speaker 2

actually had orders to fulfill our forecast, but we weren't able To get the kits together in time to ship in Q3. And so what we're in now is more of a short lead time environment. So we don't have long term backlog like we did for much of the past year. And so it's really on us to try to scramble and Meet the needs of our customers in the short term. That said, looking at Q4, it will be about the same as Q3 for Industrial Medical.

Speaker 2

As we look forward into 2024, again, it's a short lead time environment, so Our applications. I think the weakest areas right now are probably test and measurement because that's tied into semiconductor And probably some of the horticulture applications have slowed down as well. Maybe just a little more color on our Industrial Medical. This is the one area where we sell a fair amount of product through distribution. So roughly 45% of our I and M business goes through Distributors.

Speaker 2

And so we track that inventory and the resale information pretty closely. And I could tell you, as we exited Q3, We had a little less than 3 months of inventory in the channel, and that's a very comfortable place for us. And the resales Have actually increased each quarter in 2023. So we think we're in pretty good shape in the distribution channel. The other thing I'd just like to note is, Industrial Medical is a fairly new area for us, a new area to focus on at least.

Speaker 2

We've been doing it for the last 2 years. And I think it's making a difference. We're seeing some of the effort we put into it turn into wins. Some of those wins are turning to revenue. And the other positive data point is on the customization side, which I mentioned during the call.

Speaker 2

We're seeing record turnover in the customization area. And so those two aspects Where we put more focus on I and M and also doing more customization work, work To counteract any macroeconomic issues we face in the general market.

Speaker 5

Got it. That's helpful color, Steve. My follow-up question and realize you're not going to be able to be very specific. But With respect to the M and A pipeline, how much activity are you seeing in the I and M area of the business? And if you were to maybe be a little bit more specific as to whether you see More opportunities or would prefer one area versus the other in terms of where you'd like to Focus on the resources.

Speaker 2

Yes. So first, let me just start with the general approach to M and A that we have and then I'll 0 in on Industrial Medical. So I think first of all, we're fortunate that we're a consistent cash generator. Even in down cycles, We generate a lot of cash.

Speaker 3

So it gives us

Speaker 2

the ability to make strategic investments and to go on the hunt for acquisitions. So the types of targets we're looking for are going to be primarily in the industrial medical space. We're looking for targets that are good strategic fit, that are clearly accretive from a financial standpoint and have a reasonable payback period. We look for companies with strong technology and or solid product portfolio, preferably With a significant percentage of revenue coming from sole source products, similar to our portfolio, and we look for long life cycle products and technologies. So within Industrial Medical, we are looking for larger acquisitions, if possible, And we intend to integrate those acquisitions quickly like we did last year with SL Power.

Speaker 2

I think that acquisition worked out pretty well for us, very complementary portfolios and It helped us a lot in the medical area in particular. I think the biggest hurdles we're looking at now in M and A are just Valuations, valuations are in flux. And so, it probably take longer than we would expect to get a deal done. I think the important thing to realize is we're not in a rush to make a deal. So we're going to maintain financial discipline.

Speaker 2

But we have nearly $1,000,000,000 sitting on our balance sheet. So we have a lot of dry powder and I think we're an attractive acquirer.

Speaker 5

Thanks very much. I'll jump back in the queue. Thank you.

Speaker 2

Thank you, Jim.

Operator

Our next question is from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Speaker 6

Yes. Hi. Thanks for taking my question. I have 2 of them. First one, maybe a 2 part question On semi, Paul or Steve, you said semi revenues bounced around this level.

Speaker 6

Does it set assume flattish Sequentially for December. And then along the same path, Steve, you mentioned that the semi revenues were strong in I and M Plan, not depth and edge. And it seems like I and M plant is more levered to mature technologies and silicon carbide. If that's true, can you help us understand How much of your semi revenues, olivine, iron and plant came from mature versus compound semi? And then I have a follow-up.

Speaker 2

Gerald, I'll start and you can finish, Paul. Sure. So basically, what we've seen in the entire year, Krish, is There has been weakness in the etch and dent market. The overall volume has been weak and that's well known. We've been able to offset some of that weakness In three ways.

Speaker 2

1 was with our service business, which has been very robust this year. The second is with design wins, which have been ramping. And the third is in the high voltage area. And your specific question about high voltage and where it's used, It is primarily ion implanters. And to the best of my knowledge, the vast majority of that is going for mature technologies, silicon carbide as well as silicon technologies.

Speaker 2

It's there to meet the surge for high voltage technologies or for EVs and other types of applications. So that's about where we stand with high voltage.

Speaker 4

Yes. I guess more broadly what we said is that we still expected that semiconductor would be flat Up a little for the second half versus the first half. So you can kind of take a look at the math there. But yes, I think bouncing around these levels, I think, is accurate. If you look at that math, you're probably flat or up a little bit in Q4.

Speaker 4

And look, as we've talked with our customers, I think they've generally said they expect Business to be about flat as we look into 2024. But at the same time, we've worked hard to be, I'll say financially prudent in terms of how we planned our business, but also be operationally prepared because we realize that when the semiconductor starts Turn, it can turn quickly. And so we're prepared if we see the business start to rebound more quickly over the course of next year.

Speaker 6

Got it, got it. That's very helpful. And then a follow-up on data center. Obviously, the data center revenues grew nicely, like 15% Q over Q, It's still down 22% on a year over year basis. I think Steve, you mentioned as one hyperscaler customer is ramping for AI.

Speaker 6

So I'm just going to tell you is, what's the incremental 10,000,000 Revenue largely is in, but at one customer, are you sole source or is it still like multi source? And kind of like what is your strategy on a go forward basis? Because a year ago, If I'm correct, maybe the terminology is too exaggerated, but you kind of deemphasize hyperscalers and focus on INM. So is there a new renewed focus on data center? Thank you.

Speaker 2

Yes, that's a good question. And let me just it's a multi part question, so I'll give you a multi part answer. So first of all, yes, it's a soft environment today from a demand standpoint in data center. But we do have this sole source design win, which we touched On last call as well as this call, and that's been ramping and has acted as a stock absorber basically. So We're not seeing the degree of correction that some others may be because of this ramping design win.

Speaker 2

I think this is a cyclical market. We don't know exactly when the demand is going to snap back. But if history is any guide, It could snap back as soon as first half twenty twenty four because the last time we went through this inventory digestion, it took us about 3 quarters to get through it. So we're ready for a snapback in the data center market. We think the fundamentals are great.

Speaker 2

Still a lot of data being generated and transmitted And stored. So the long term story is very strong. We think there are a couple accelerators next year. 1 is AI, of course. The second is the transition to 48 volts.

Speaker 2

So we think there are some positives on the horizon for data center, But our strategy remains unchanged. We're still going after opportunities where we can get paid for the engineering value that we provide. And so again, we're trying to keep our margins going up into the right and we're not as concerned about revenue growth in data center. Got

Speaker 6

it. Thanks a lot, Steve. I appreciate it.

Operator

Your next questions are from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your questions.

Speaker 7

Thanks. You talked about inventory being in good shape in the channel, but can you expand on your comment about having a more aggressive go to market strategy And tie that into the efforts to cultivate distribution and VAR relationships. It seems like that will be an important force multiplier if end markets do get a little bit weaker going forward.

Speaker 2

Yes, Steve. I think we've done a lot on the go to market strategy. Let me just list some of the things that we're doing that are, I think, most important. The first is probably our website. We launched the new website in August and It's been a big hit with our customers and our distributors.

Speaker 2

If we take a look at some of the statistics, today, We're seeing roughly double number of hits on a daily basis on our website and we've tripled the number of customers who are downloading and interacting with the website, typically downloading data sheets or application notes. So we're very happy with that. And then when we add The e commerce capability next quarter, I think that's going to help us as a company. It's also going to help our distributors as well. So that's a big plus.

Speaker 2

The second big thing we did was on the sales side, where we basically split our sales force into 2 parts. And one of those parts is focused exclusively on industrial and medical. So those people, the apps engineers and the sales engineers Only get paid on industrial medical design wins and revenue. So it's been a it's brought a tremendous amount of focus To our effort, not just through distributors, but also directly with customers. So that's been a big plus for the company.

Speaker 2

And thirdly, I think we raised our game in the marketing communications area and our ability to train our distributors and sales force on how to sell our product And how they fit from a customer standpoint. So I think we're in much better shape than we were 2 years ago.

Speaker 4

I'll just add to that, Steve. I think our prepared comments were such that we think that the inventory and the distribution channel is about right. But we've actually seen more sell through. And you're right, as market forces potentially weaken, getting broader reach One of our primary strategies and the distribution channel is certainly a key part of that and there's even potential for us to expand further From a distribution channel perspective as we focused on that.

Speaker 7

Got it. Thanks. And Paul, backlog is down about 50% year over year to $514,000,000 which I think is the high end of what you consider a more normal range. Can you talk through segment exposure in backlog, timing of delivery and maybe talk through book to bill for Semiconductor and Industrial Medical?

Speaker 4

Yes. So you're right, the backlog is down. Frankly, the backlog we had a year ago is extremely unusual. If you go back historically before the part shortages we saw roughly 24 to 30 months ago, we would typically carry backlog That was 60% of quarterly revenue. And that's because a lot of our products are relatively short lead times and we have many customers They don't technically give us orders.

Speaker 4

So there's not really a book to bill because we fill revenue through JIT bins or through hub poles. And we'd expect to move back towards that situation and that's exactly what's happening. I think by the end of this Q4, we'll be back Well, within that $400,000,000 to $500,000,000 range, about $400,000,000 is about a quarter's worth of backlog. That's probably a quarter or quarter plus is Probably where things will run, probably a little more than they did historically. So we think the contraction in backlog is pretty natural and it mainly just reflects Those shortened lead times and people returning to their normal ordering patterns.

Speaker 4

From that perspective, if you look at what's in backlog, the majority of it is relatively short orders now, I'd say within A quarter and a half or less. It's also still heavily weighted towards industrial and medical And semiconductor. And as we look forward, again, it's hard to say a particular book to bill because many of our customers don't order

Speaker 7

Got it. Appreciate the detail. Thanks.

Operator

Our next question is from the line of Mehdi Hosseini with SIG. Please proceed with your question.

Speaker 3

Yes, thanks for taking my question. Paul, just want to go back to the backlog. When I look at commentary by some of your customers in industrial and semi, it seems like They don't really have a whole lot of visibility looking into calendar year 'twenty four. And as such, Could there be a scenario where your backlog would actually move towards the low end of that $400,000,000 to $500,000,000 band?

Speaker 4

Yes, I think it could. Again, our estimate there is a little bit of a based on market factors and where things Could end up historically, we've run under that level and that would be normal. So I think as Customers move back to more normalized patterns, we could certainly move towards the low end of that. That wouldn't be a surprise. Again, that would still be About a quarter's worth of backlog, which should be higher than the historical norm.

Speaker 3

Okay. And then just double clicking on your semi business, If your customers are right now I think elaborate, we're talking about 2024 as a flat in terms of the system Shipment or system revenue compared to 23, does that imply that just some inventory refresh Of components would lead to some growth in Advanced Energy's Semiconductor Business Unit?

Speaker 2

Yes. I think that's a fair scenario, Mehdi. Like you said, the customer consensus seems to be that their end customer shipments will be Roughly flat year on year.

Speaker 3

Right.

Speaker 2

But we do see some room for growth in the jet bins and we see some room for growth in our new products as well. And that should push us into slight growth year on year.

Speaker 3

Yes. Got it. Thank you.

Operator

Thank you. The next question is from the line of Mark Miller with Benchmark. Please proceed with your question.

Speaker 8

Thank you for the question. You talked about The implant was driving your high voltage opportunity. In the last couple of weeks, though, there's been concern about slowing in the EV market. EV sales in China this past quarter were down 27% sequentially. Are you seeing any slowing of quoting activity or orders as a result of this?

Speaker 8

Ford also delayed its capacity additions because of slowness.

Speaker 2

Yes. Mark, the short answer is no, we have not seen that. So right now, our backlog is still very robust, very strong, And we're not getting any signals yet from our customers that they're going

Speaker 6

to intend to forecast downward.

Speaker 8

Next question, Telecom, are any of your customers dealing with an inventory digestion situation?

Speaker 2

And your question was specific to telecom?

Speaker 8

Correct.

Speaker 2

Or just in general?

Speaker 8

Just telecom.

Speaker 2

Just telecom?

Speaker 4

I'm not aware that they're dealing with a lot of inventory, but it's also clear if you look at the telecom manufacturers, they're in a pretty severe Down cycle right now. So I don't think there's a lot of inventory overhang there, but also there's not a lot of orders. So one of the reasons we talked In our prepared remarks about that, we would anticipate that our telecom and network business is continuing to trend back towards $30,000,000 run rate versus where it's ran the last most of the last year.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Speaker 9

Yes. Thanks for taking the question. We're talking about all of the macroeconomic headwinds in a lot of the verticals. But you also said that valuation perspective M and A are Too expensive. From the perspective of the sellers who are insisting on these high deal What are they looking at?

Speaker 2

I can only comment for Advanced Energy and I think valuations have adjusted Over the past year and a half, and I think different parties adjust the new valuation at different rates. And I think that's going to I think the answer to your question is going to vary depending on which target we're talking about. We think over the next 6 to 12 months, we'll probably be able to come to A deal with 1 or more of these targets. But again, it's going to depend on if it makes financial sense for Advanced Energy and strategic sense for the company.

Speaker 9

Right. You also mentioned that for M and A, you're looking for kind of chunkier Deal sizes versus maybe what you would consider historically. If Artisan Was the largest M and A deal in the company's history. Compared to that, are you looking to do something even larger?

Speaker 3

I think if you want to

Speaker 2

put a goalpost, I would say, SR Power would be the smallest kind of deal we would like to do in I and M RS and B, the largest type of deal. So it's going to be somewhere in between those two goalposts.

Speaker 9

Okay. Yes, that's interesting. And lastly, within Industrial Medical, I periodically ask this question, More and more headlines about new solar manufacturing, not just in the United States, but More broadly outside of China, can you talk about your opportunities in that infrastructure build out?

Speaker 2

Yes. I think in solar, our primary opportunity is probably in the plasma space, where many of these Solar cells, solar panels need extremely precise thin layers of various things deposited on flat surface. And this is an ideal type of application for plasma. And so we provide basically RF solutions For dental manufacturers, which includes solar.

Speaker 9

All right. Thanks very much.

Speaker 2

Thank you.

Operator

Thank you. Ladies and gentlemen, this will conclude today's conference call. You may disconnect your lines at this time and thank you for your participation.

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