NASDAQ:AEIS Advanced Energy Industries Q1 2023 Earnings Report $96.46 +4.97 (+5.43%) As of 01:56 PM Eastern This is a fair market value price provided by Polygon.io. Learn more. Earnings HistoryForecast Advanced Energy Industries EPS ResultsActual EPS$1.10Consensus EPS $1.01Beat/MissBeat by +$0.09One Year Ago EPSN/AAdvanced Energy Industries Revenue ResultsActual Revenue$425.04 millionExpected Revenue$411.13 millionBeat/MissBeat by +$13.91 millionYoY Revenue GrowthN/AAdvanced Energy Industries Announcement DetailsQuarterQ1 2023Date5/3/2023TimeN/AConference Call DateWednesday, May 3, 2023Conference Call Time4:30PM ETUpcoming EarningsAdvanced Energy Industries' Q1 2025 earnings is scheduled for Wednesday, April 30, 2025, with a conference call scheduled at 4:30 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Advanced Energy Industries Q1 2023 Earnings Call TranscriptProvided by QuartrMay 3, 2023 ShareLink copied to clipboard.There are 9 speakers on the call. Operator00:00:00Greetings, and welcome to the Advanced Energy First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edwin Monk, Vice President of Strategic Marketing and Investor Relations. Operator00:00:29Thank you, sir. You may begin. Speaker 100:00:31Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy Q1 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 in the coming months. Speaker 100:00:51If you have not seen our earnings press release and presentation, you can find them on our website at ir.avanceenergy.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, May 1, 2023, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be On today's call, our financial results are presented on a non GAAP financial basis unless otherwise specified. Speaker 100:01:34Exclude from non GAAP results are stock 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 Kelly. Speaker 200:01:57Thanks, Edwin. Good afternoon, everyone. Thanks for joining the call. 1st quarter revenue and earnings per share exceeded our guidance. Strength in the industrial medical market as well as improved component supply drove year on year revenue growth of 7%. Speaker 200:02:15Our operations team executed well, quickly turning critical components into revenue late in the quarter. Moving forward, we believe that 2023 will be a pivotal year for the company. The easing of supply chain bottlenecks means that our customers are now squarely focused on new product development and product differentiation. The timing is perfect for us since we have recently launched a number of innovative new products with highly differentiated capabilities. We are expecting a record number of design wins in 2023, laying a strong foundation for profitable revenue growth. Speaker 200:02:56We believe that technology leadership coupled with superior operational performance is the recipe for success in our business. Speaker 300:03:05Over the Speaker 200:03:05past 18 months, we have made substantial strides for its best in class operational performance, particularly in the semiconductor space. We see further improvement and are taking advantage of the 2023 Market environment to focus on operational efficiency. We are accelerating the consolidation of our factory footprint, which will improve productivity and lower fixed costs. As part of that consolidation plan, we will expand our factory in Mexicali, where we expect to quadruple output over the next 2 to 3 years. Our enhanced capabilities in North America will complement Our strong factory network in Southeast Asia. Speaker 200:03:50Now I'd like to provide an update on the supply chain. The overall supply situation continues to improve. However, shortages of power MOSFETs and certain older node ICs continue to constrain shipments into many of our markets. We expect these constraints to be largely resolved by the end of the year, allowing us to clear most of the remaining overdue backlog. This is a high priority for the company since resolving the remaining constraints will drive higher revenue, I'll now provide more detail for each of our markets. Speaker 200:04:34As expected, Q1 semiconductor revenue declined sequentially. Record service revenue offset some of the weakness in the broader market. On the product revenue side, there were 2 bright spots. The first was ion implant applications, where demand for Advanced Energy's high voltage systems is extremely robust. The second was ramping design wins in the etch and deposition areas. Speaker 200:05:02In addition, we began shipping beta units of 2 new plasma power products to our customers. We believe that these highly differentiated platform products offer best in class power control to our customers who are developing next generation plasma etch And deposition systems. We expect to close the sign wins for these new products in the coming year. These wins should drive meaningful market share gains over the course of this decade. We plan to formally launch these new platform products Moving on to Industrial and Medical. Speaker 200:05:461st quarter revenue grew 48% year on year to $123,000,000 A new record for the company. The upside was driven by improved component availability and solid demand. In the industrial space, demand in thin film manufacturing applications was very strong. In the Q1, We also secured industrial design wins in test and measurement, manufacturing equipment and 3 d printing applications. In medical, we won designs in electrosurgery, life science, imaging and laser applications. Speaker 200:06:26We are also benefiting from new cross selling opportunities made possible by last year's acquisition of SL Power. Many SL Power customers are now evaluating and designing in medical products from other parts of our portfolio and vice versa. We continue to invest heavily in dedicated engineering and customer facing resources for the industrial and medical market. We believe that Avast Energy provides a unique bundle of technology, financial strength, operational expertise, Staying power and technical support, which will drive share gains in this broad market. In data center computing, 1st quarter revenue declined to $60,000,000 mainly due to component shortages. Speaker 200:07:18We also saw reduced demand from some hyperscale customers. Moving forward, We believe that there is upside in this market as the component shortages are resolved. In addition, we are continuing to focus our engineering team on high value opportunities. In telecom and networking, revenue grew sequentially and year on year $8,000,000 largely due to improved component availability. Now let me summarize the quarter and our outlook. Speaker 200:07:51The Q1 results validate the benefits of our diversification strategy as we performed above expectations despite the semiconductor market correction. We executed well and delivered upside to our financial targets. At the same time, we are taking actions to control our costs and accelerate the consolidation of our manufacturing footprint. For the full year, we believe that our semiconductor business We'll perform better than the market due to several pockets of strength. Outside of semiconductor, component shortages are still gating our revenue, but we expect that most shortages will be resolved by the end of this year. Speaker 200:08:33Therefore, We remain confident that our aggregate revenue in markets outside of semiconductor will be stable year on year. Looking beyond this year, we are encouraged by the strong customer interest in our new products. We believe the technology leadership, Coupled with solid operational performance, we'll drive strong customer engagement levels with Advanced Energy. Ultimately, These engagements will drive long term profitable growth and increased value for shareholders. Paul will now provide more detailed financial information. Speaker 400:09:14Thank you, Steve. Good afternoon, everyone. 1st quarter revenue of $425,000,000 and EPS of $1.24 both exceeded the midpoint of our guidance, reflecting solid operational execution. Revenue grew 7% year over year and 3% organically with record revenue in the industrial medical market, partially offsetting the anticipated weakness in semiconductor. Our backlog exiting the quarter was $756,000,000 down 14% from $875,000,000 at the end of the 4th quarter. Speaker 400:09:48The sequential decline was driven primarily by customers reducing orders We're out quarter deliveries as we improved our lead times. As we further resolve critical part issues, we continue to expect our backlog will normalize to a level of $400,000,000 to $500,000,000 over the next few quarters. Now let's review our financial results in more detail. Revenue in the semiconductor market was $194,000,000 down 4% year over year and 16% sequentially. The sequential decline was slightly better than our guidance as we delivered record revenue in our service business, executed to meet higher demand for ion implant applications and completed restocking of customer inventories back to targeted levels. Speaker 400:10:37Revenue in the industrial and medical market was a record $123,000,000 up 48% year over year and up 3% from last quarter. Excluding the SL Power acquisition, organic revenue grew 31% from last year and 8% sequentially. We delivered a record quarter despite continued constraints of select components for this market. Data center computing revenue was down 22% year over year and 37% sequentially to $60,000,000 Although we saw lower demand from some hyperscale customers, revenue was primarily impacted by supply chain challenges as we saw backlog actually increase in the quarter for these products. As a result, we expect revenue to increase from this trough level over the next Few quarters as parts availability improves. Speaker 400:11:33Telecom and networking revenue was up 36% year over year and 8% sequentially to $48,000,000 It was one of the strongest quarters in recent history as we were able to secure more parts to meet demand. 1st quarter gross margin was 36.8%, up 20 basis points from last year and last quarter. Gross margin remained relatively flat sequentially despite the impact of lower volume as a result of modest reduction in material premiums, Favorable mix and initial actions we're taking to optimize our factory footprint and reduce costs. While we expect higher material costs to continue to negatively impact our results, we are encouraged by early signs of loosening in the supply chain. As a result, we continue to expect gradual improvement in gross margin towards the end of the year as premiums abate and historical costs flow through our inventory. Speaker 400:12:32Operating expenses were $99,700,000 down slightly from last quarter on reduced SG and A, partially offset by higher R and D investments driven by new product and platform launches expected this year. Operating margin for the quarter was 13.4%. Depreciation was $9,500,000 and our adjusted EBITDA was $66,000,000 Non GAAP other income was a positive $500,000 due to higher net interest income, partially offset by foreign exchange losses. Going forward, we expect our non GAAP other income to be about breakeven as we continue to benefit from higher interest earnings in the current environment and our low cost debt structure. Last quarter, we initiated our 2023 restructuring plan to optimize our manufacturing operation and achieve other targeted reductions During the Q1, we completed the closure of our Shenzhen facility, Reduced our total headcount in operations by over 800 people, announced plans to close an additional factory in China and initiated further actions across the company. Speaker 400:13:47As a result, we recognized a further $1,000,000 in restructuring costs in Q1 and expect to incur an additional $3,000,000 to $5,000,000 over the remainder of 2023. Rounding out the P and L, Our non GAAP tax rate was 18.1%. For 2023, we are modeling our GAAP and non GAAP tax rate to remain in the 18% to 19% range. As a result, 1st quarter EPS was $1.24 which was flat from last year and down from $1.70 in the previous quarter. Turning now to the balance sheet. Speaker 400:14:24Total cash and marketable securities at the end of the Q1 were $462,000,000 With net cash of $93,000,000 Cash flow from continuing operations was $32,000,000 compared to $10,000,000 last year. Inventory increased $26,000,000 or 7% sequentially on higher raw materials as a result of lower revenue And increased finished goods on timing of customer shipments. We expect these finished goods to largely ship through in the Q2. As a result, inventory days were 135 and turns decreased from 3.3 in Q4 to 2.7 in Q1. We saw a corresponding increase in DPO, which increased to 62 days. Speaker 400:15:10DSO was also up slightly to 62 days on timing of customer shipments late in the quarter. During the Q1, we invested $16,000,000 in CapEx, slightly below our expectation for 2023 of approximately 4% of sales. We also made debt principal payments of $5,000,000 and paid $3,800,000 in dividends. Turning now to our guidance. The demand environment continues to be mixed across our markets. Speaker 400:15:41As we noted last quarter, We expect our semiconductor revenue to decline again in the Q2 in the mid teens sequentially. At the same time, We expect Q2 semi revenues to be the trough for the year, with second half revenue being flat to up versus the first half. In our other markets, we expect revenue in aggregate to grow sequentially in Q2 as we secure additional critical components. As a result, we are forecasting our 2nd quarter revenue to be approximately $410,000,000 plus or minus $20,000,000 We expect gross margin in Q2 to be in the low 36% range on anticipated mix and lower volumes, partially offset by a modest improvement and material cost premiums. We expect gross margins to remain at or above this level in the second half of the year. Speaker 400:16:36As we stated last quarter, we expect Q2 operating expenses to increase $2,000,000 to $3,000,000 sequentially due to annual salary changes, Inflation and continued R and D investment. However, we anticipate OpEx to moderate slightly in the second half of the year As we see the benefits of our actions to control spending, while maintaining investment in critical R and D and growth initiatives. As a result, we expect Q2 non GAAP earnings per share to be $1 plus or minus $0.25 Before I open it up for questions, I want to highlight a few important points. First, our diversification strategy is working. Record revenue in our industrial and medical market and solid demand across most of our non semi markets partially offset the anticipated weakness in the semiconductor market. Speaker 400:17:27As a result, we are able to deliver year on year revenue growth for the Q1. 2nd, as component availability gradually improves, We are well positioned to improve gross margins as we exit the year, enabling more meaningful leverage in our model in 2024. Lastly, we believe our strong cadence of new products will lead to more business for Advanced Energy over time, enabling us to grow share and exit the downturn stronger. As a result, we continue to believe we are well positioned to perform better than our markets this year, Deliver results substantially better than in previous cycles and to gain share and grow earnings as the markets improve. With that, let's take your questions. Speaker 400:18:13Operator? Operator00:18:17Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question Our first question comes from Quinn Bolton with Needham and Company. Please proceed with your question. Our first question is from Quinn Bolton with Needham and Company. Operator00:19:01Please proceed with your question. Speaker 500:19:03Hey, guys. Can you hear me now? Speaker 600:19:07Yes, we can hear you. Yes. Speaker 500:19:08Okay. Sorry, I was on mute. I just want to say congratulations on the nice results. I wanted to start with the industrial and medical business, which looks Like it's very strong, especially on a year over year basis. Can you just give us some more color about some of the drivers for that business, Both in the near term and based on your current backlog, how sustainable do you think this industrial demand will be this year? Speaker 700:19:36Yes. Thanks, Quinn. This is Steve. Yes, we're very enthusiastic about the industrial medical part of our business. We started really focusing Industrial Medical over the past year and a half. Speaker 700:19:47So we've put a lot of new engineers in place to develop products faster. We also reorganized our sales force to call on more industrial medical accounts directly. So we're seeing the results of that and record design win activity. And also we're seeing quite a bit of cross selling activity in the medical space Based on our purchase of SL Power about 1 year ago. I think the nice thing about I and M, Industrial Medical, It's very broad based. Speaker 700:20:19So even though one segment may be down, another part of that market could be up. So it tends to be pretty stable. Right now, we have a significant industrial medical backlog, which is overdue. So we believe over the next couple of quarters, we'll be able to ship more of that overdue backlog based on increased development parts. So we're very optimistic about that part of our business in 2023. Speaker 500:20:47Excellent. And then for Paul, I guess just a question on the Material cost headwinds to gross margin, are they still in the sort of 250 to 300 basis point range? Is that the right kind of Headwind to be thinking about? Speaker 600:21:04Yes, Quinn, I think the certainly, we've seen a little bit of improvement on that front. When we look at it this quarter, it's probably in the 150 to 200 basis points if you look at the absolute number. Now part of that's Captured inventory, so it will flow through, you'll call that lower numbers, captured inventory, so it will flow through over the next quarter or so. But it Seems to be early signs as it seems to be coming down. Our best view continues to be what we said last quarter is that we expect that these costs will Continued debate over the course Speaker 300:21:35of the Speaker 600:21:35quarter and we should be able to exit the year, hopefully at a place where we're seeing most of these costs working their way out of our P and Speaker 500:21:44L. Perfect. Thank you. Operator00:21:49Our next question comes from Krish Sankar with TD Khan, please proceed with your question. Speaker 300:21:56Yes. Hi. Thanks for taking my question. I had a couple of them. First one is actually is a 2 part question, Both for you, Steve and Paul. Speaker 300:22:02Number first part is, you spoke about Smedes revenues dropping in Q2 And then improving, I'm just kind of curious what gives you the confidence. And the second part of the question is, last quarter, if I remember, there was probably $85,000,000 to $90,000,000 from back Well, that got removed because of the China export controls, but some of your customers spoke about shipping back to some of the lagging edge Memory Chinese customers. So I'm kind of curious how to think about how much of that backlog comes back into your backlog? And is that Part of the reason why you feel comfortable about the second half revenue improving. And then I have a follow-up. Speaker 700:22:44Hey, Chris. This is Steve. I assume we're talking just about the semiconductor part of our backlog. Is that correct? Speaker 300:22:49Yes. Yes. Speaker 700:22:50Okay. Yes. So we do believe the second half will be stronger than the second quarter. And so we're We're bullish on that because we've seen the backlog increase. And I think part of that increase is due to some of the clarifications that our customers have received about shipping into China. Speaker 700:23:09So we've seen some strengthening in the backlog in the second half. I think the other part of it is, we do see our continuing pockets of strength We'll be benefiting us in the second half as well as the first half. We talked about our service business. The other one that's very exciting for us is the high voltage business. As the demand for ion implant applications is very strong And that's being led by the expansions in capacity for silicon carbide and other power type processes. Speaker 600:23:44Yes. Krish, I think the other factor is, we expect Q2 is kind of our trough because we've completed Basically, the selling of inventory to our customers, which has helped us, frankly, the last two quarters kind of buffer the lower market Conditions, so we think that's largely washed through. As we look at the second half, our customers are talking about stronger trailing edge and They are selling into China, which we believe will benefit us as well. Speaker 300:24:14Got it. Is there a way to quantify how much of this $85,000,000 to $90,000,000 backlog that got removed because of China gets back in? Speaker 600:24:23Yes, we haven't quantified that Publicly at this point, what we've put in the backlog at this point, I'd say, is quite limited where we have direct Line of sight to customers that we have a verification process in place to ensure that nothing's going to any leading edge applications. So it's pretty limited at this point. And I suspect it will kind of drop in a little bit over time as we're able Make sure we have good visibility to where product is Speaker 300:24:53going. Got it. Got it. Thanks for the call. And then just as a follow-up on supply chain. Speaker 300:24:58You kind of mentioned that there's still constraints on the MAF system power ICs and it should probably update by the end of the year. I'm kind of curious, like, we've kind of been like 2 years or a little more 2 years into this thing. And It doesn't seem like your customers are having that issue of component constraints, but you're still having it. I'm just curious, Like, is that specific to just those few semiconductor devices and that is impacting and Does it mean that you have to figure out whether to ship it to semi customers, INM customers, hyperscalers? Or is there something else that's going on that In general, because it seems like some industry is going through a cyclical downturn. Speaker 300:25:44So I'm just kind of curious and people are all willing capacity, Yes. Here we are 2 years later talking about supply constraints. Speaker 700:25:52Yes. I think, Krish, it's a legitimate complaint. We wonder the same thing sometimes. But quite frankly, the list has narrowed considerably over the past 2 years. So, it's a much more compact list. Speaker 700:26:03However, And all it takes is one missing power MOSFET or one missing power IC and we can't ship the box. So we continue to compete with other industrial customers and automotive customers for this trailing edge capacity. But based on what we're experiencing now, what we see in the second half, we think that we'll be over most of these issues by the end of this year. Operator00:26:35Our next question comes from Steve Barger with KeyBanc. Please proceed with your question. Speaker 800:26:41Hey, thanks. Steve, I know driving strong customer engagement is a priority for the year, and I think you're focused on small and medium sized customers because of the growth rate. First, how are you measuring engagement? Is it just having a dialogue? Is it based on actual sales conversion? Speaker 800:26:59What metric are you managing to there to drive Speaker 700:27:04Yes. Good question, Steve. And I think about that in 2 ways. 1 is customer pull for new products. And with our large semiconductor customers, like I said, they're fully engaged with the 2 new platforms that I discussed earlier in the call. Speaker 700:27:22These are technology leading products and the customer pull is equal to the supplier push, Which is always nice to see. I think in Speaker 200:27:31the larger Speaker 700:27:32markets, what I've seen is with our increased rate of new product launches, We see a lot of excitement in the field, around the world actually. And we measure that every month in our design win funnel. And so we basically look at all the opportunities that are out there that we're trying to close. And right now, our closure rate is approaching 40%, which is pretty good In my experience. So, the number is high and the closure rate is excellent. Speaker 700:28:02So that's how I measure customer engagement. Speaker 800:28:05And when you think about that 40% closure rate, how like is the pool of potential touch points growing Every quarter, so that 40% part of the pie is on a growing pie on a consistent basis? Speaker 700:28:23Yes, it's a growing pot because in the past, we have not focused on industrial medical accounts. So just in the past year and a half, I think we've done some significant things. Probably the most significant thing is Goline have our sales force on industrial medical design wins and revenue. And so they're very, incented to go after new opportunities That's small and medium sized accounts. Again, it's a really great investment for us because, generally speaking, these Design wins, although they're smaller, they tend to last a long time and they tend to be sole source. Speaker 700:29:02And so It's a nice market for us. And it's one of 3 markets we really focus in on, semiconductor, industrial and medical. Speaker 800:29:13Yes. And just one follow-up on that. Given the size of the industrial and medical opportunity and your focus on it, How are you thinking about organic growth for that segment on a normalized basis? I mean, through cycles Can it be a double digit grower on a regular basis? And over time, can it catch up to semi equipment in terms of size? Speaker 700:29:36We haven't articulated the specific growth metrics, Steve, but I've got very high hopes of business. We think it is an excellent business to be in and it buffers us during these semiconductor downturns, which will continue to happen moving forward. We're seeing some of the benefits of that strategy this year. So I anticipate the industrial medical business will continue to grow. We have a lot of room to grow in that space. Speaker 700:30:02And with a little focus in energy, I don't see a problem doing that. Speaker 800:30:08Great. Thank you. Operator00:30:35We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallAdvanced Energy Industries Q1 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Advanced Energy Industries Earnings HeadlinesKeyBanc Sticks to Its Buy Rating for Advanced Energy (AEIS)April 18, 2025 | markets.businessinsider.comAdvanced Energy Announces First Quarter 2025 Earnings Date on April 30April 16, 2025 | businesswire.comTrump purposefully forcing markets to crash…Whether you agree with the plan or not doesn’t matter. It’s happening. 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Email Address About Advanced Energy IndustriesAdvanced Energy Industries (NASDAQ:AEIS) provides precision power conversion, measurement, and control solutions in the United States and internationally. The company's plasma power products offer solutions to enable innovation for semiconductor and thin film plasma processes, such as dry etch and deposition. It also provides high and low voltage power products used in a range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data centers computing, networking, and telecommunications. In addition, the company supplies sensing, controls, and instrumentation products for advanced measurement and calibration of power and temperature. Further, the company provides calibration, conversions, upgrades, and refurbishments and used equipment to companies, as well as repair services. Further, it offers warranty and after-market repair services. It offers its products through a direct sales force, independent sales representatives, channel partners, and distributors. Advanced Energy Industries, Inc. was incorporated in 1981 and is headquartered in Denver, Colorado.View Advanced Energy Industries ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Tesla Earnings Miss, But Musk Refocuses and Bulls ReactQualcomm’s Range Narrows Ahead of Earnings as Bulls Step InWhy It May Be Time to Buy CrowdStrike Stock Heading Into EarningsCan IBM’s Q1 Earnings Spark a Breakout for the Stock? 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There are 9 speakers on the call. Operator00:00:00Greetings, and welcome to the Advanced Energy First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edwin Monk, Vice President of Strategic Marketing and Investor Relations. Operator00:00:29Thank you, sir. You may begin. Speaker 100:00:31Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy Q1 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 in the coming months. Speaker 100:00:51If you have not seen our earnings press release and presentation, you can find them on our website at ir.avanceenergy.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, May 1, 2023, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be On today's call, our financial results are presented on a non GAAP financial basis unless otherwise specified. Speaker 100:01:34Exclude from non GAAP results are stock 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 Kelly. Speaker 200:01:57Thanks, Edwin. Good afternoon, everyone. Thanks for joining the call. 1st quarter revenue and earnings per share exceeded our guidance. Strength in the industrial medical market as well as improved component supply drove year on year revenue growth of 7%. Speaker 200:02:15Our operations team executed well, quickly turning critical components into revenue late in the quarter. Moving forward, we believe that 2023 will be a pivotal year for the company. The easing of supply chain bottlenecks means that our customers are now squarely focused on new product development and product differentiation. The timing is perfect for us since we have recently launched a number of innovative new products with highly differentiated capabilities. We are expecting a record number of design wins in 2023, laying a strong foundation for profitable revenue growth. Speaker 200:02:56We believe that technology leadership coupled with superior operational performance is the recipe for success in our business. Speaker 300:03:05Over the Speaker 200:03:05past 18 months, we have made substantial strides for its best in class operational performance, particularly in the semiconductor space. We see further improvement and are taking advantage of the 2023 Market environment to focus on operational efficiency. We are accelerating the consolidation of our factory footprint, which will improve productivity and lower fixed costs. As part of that consolidation plan, we will expand our factory in Mexicali, where we expect to quadruple output over the next 2 to 3 years. Our enhanced capabilities in North America will complement Our strong factory network in Southeast Asia. Speaker 200:03:50Now I'd like to provide an update on the supply chain. The overall supply situation continues to improve. However, shortages of power MOSFETs and certain older node ICs continue to constrain shipments into many of our markets. We expect these constraints to be largely resolved by the end of the year, allowing us to clear most of the remaining overdue backlog. This is a high priority for the company since resolving the remaining constraints will drive higher revenue, I'll now provide more detail for each of our markets. Speaker 200:04:34As expected, Q1 semiconductor revenue declined sequentially. Record service revenue offset some of the weakness in the broader market. On the product revenue side, there were 2 bright spots. The first was ion implant applications, where demand for Advanced Energy's high voltage systems is extremely robust. The second was ramping design wins in the etch and deposition areas. Speaker 200:05:02In addition, we began shipping beta units of 2 new plasma power products to our customers. We believe that these highly differentiated platform products offer best in class power control to our customers who are developing next generation plasma etch And deposition systems. We expect to close the sign wins for these new products in the coming year. These wins should drive meaningful market share gains over the course of this decade. We plan to formally launch these new platform products Moving on to Industrial and Medical. Speaker 200:05:461st quarter revenue grew 48% year on year to $123,000,000 A new record for the company. The upside was driven by improved component availability and solid demand. In the industrial space, demand in thin film manufacturing applications was very strong. In the Q1, We also secured industrial design wins in test and measurement, manufacturing equipment and 3 d printing applications. In medical, we won designs in electrosurgery, life science, imaging and laser applications. Speaker 200:06:26We are also benefiting from new cross selling opportunities made possible by last year's acquisition of SL Power. Many SL Power customers are now evaluating and designing in medical products from other parts of our portfolio and vice versa. We continue to invest heavily in dedicated engineering and customer facing resources for the industrial and medical market. We believe that Avast Energy provides a unique bundle of technology, financial strength, operational expertise, Staying power and technical support, which will drive share gains in this broad market. In data center computing, 1st quarter revenue declined to $60,000,000 mainly due to component shortages. Speaker 200:07:18We also saw reduced demand from some hyperscale customers. Moving forward, We believe that there is upside in this market as the component shortages are resolved. In addition, we are continuing to focus our engineering team on high value opportunities. In telecom and networking, revenue grew sequentially and year on year $8,000,000 largely due to improved component availability. Now let me summarize the quarter and our outlook. Speaker 200:07:51The Q1 results validate the benefits of our diversification strategy as we performed above expectations despite the semiconductor market correction. We executed well and delivered upside to our financial targets. At the same time, we are taking actions to control our costs and accelerate the consolidation of our manufacturing footprint. For the full year, we believe that our semiconductor business We'll perform better than the market due to several pockets of strength. Outside of semiconductor, component shortages are still gating our revenue, but we expect that most shortages will be resolved by the end of this year. Speaker 200:08:33Therefore, We remain confident that our aggregate revenue in markets outside of semiconductor will be stable year on year. Looking beyond this year, we are encouraged by the strong customer interest in our new products. We believe the technology leadership, Coupled with solid operational performance, we'll drive strong customer engagement levels with Advanced Energy. Ultimately, These engagements will drive long term profitable growth and increased value for shareholders. Paul will now provide more detailed financial information. Speaker 400:09:14Thank you, Steve. Good afternoon, everyone. 1st quarter revenue of $425,000,000 and EPS of $1.24 both exceeded the midpoint of our guidance, reflecting solid operational execution. Revenue grew 7% year over year and 3% organically with record revenue in the industrial medical market, partially offsetting the anticipated weakness in semiconductor. Our backlog exiting the quarter was $756,000,000 down 14% from $875,000,000 at the end of the 4th quarter. Speaker 400:09:48The sequential decline was driven primarily by customers reducing orders We're out quarter deliveries as we improved our lead times. As we further resolve critical part issues, we continue to expect our backlog will normalize to a level of $400,000,000 to $500,000,000 over the next few quarters. Now let's review our financial results in more detail. Revenue in the semiconductor market was $194,000,000 down 4% year over year and 16% sequentially. The sequential decline was slightly better than our guidance as we delivered record revenue in our service business, executed to meet higher demand for ion implant applications and completed restocking of customer inventories back to targeted levels. Speaker 400:10:37Revenue in the industrial and medical market was a record $123,000,000 up 48% year over year and up 3% from last quarter. Excluding the SL Power acquisition, organic revenue grew 31% from last year and 8% sequentially. We delivered a record quarter despite continued constraints of select components for this market. Data center computing revenue was down 22% year over year and 37% sequentially to $60,000,000 Although we saw lower demand from some hyperscale customers, revenue was primarily impacted by supply chain challenges as we saw backlog actually increase in the quarter for these products. As a result, we expect revenue to increase from this trough level over the next Few quarters as parts availability improves. Speaker 400:11:33Telecom and networking revenue was up 36% year over year and 8% sequentially to $48,000,000 It was one of the strongest quarters in recent history as we were able to secure more parts to meet demand. 1st quarter gross margin was 36.8%, up 20 basis points from last year and last quarter. Gross margin remained relatively flat sequentially despite the impact of lower volume as a result of modest reduction in material premiums, Favorable mix and initial actions we're taking to optimize our factory footprint and reduce costs. While we expect higher material costs to continue to negatively impact our results, we are encouraged by early signs of loosening in the supply chain. As a result, we continue to expect gradual improvement in gross margin towards the end of the year as premiums abate and historical costs flow through our inventory. Speaker 400:12:32Operating expenses were $99,700,000 down slightly from last quarter on reduced SG and A, partially offset by higher R and D investments driven by new product and platform launches expected this year. Operating margin for the quarter was 13.4%. Depreciation was $9,500,000 and our adjusted EBITDA was $66,000,000 Non GAAP other income was a positive $500,000 due to higher net interest income, partially offset by foreign exchange losses. Going forward, we expect our non GAAP other income to be about breakeven as we continue to benefit from higher interest earnings in the current environment and our low cost debt structure. Last quarter, we initiated our 2023 restructuring plan to optimize our manufacturing operation and achieve other targeted reductions During the Q1, we completed the closure of our Shenzhen facility, Reduced our total headcount in operations by over 800 people, announced plans to close an additional factory in China and initiated further actions across the company. Speaker 400:13:47As a result, we recognized a further $1,000,000 in restructuring costs in Q1 and expect to incur an additional $3,000,000 to $5,000,000 over the remainder of 2023. Rounding out the P and L, Our non GAAP tax rate was 18.1%. For 2023, we are modeling our GAAP and non GAAP tax rate to remain in the 18% to 19% range. As a result, 1st quarter EPS was $1.24 which was flat from last year and down from $1.70 in the previous quarter. Turning now to the balance sheet. Speaker 400:14:24Total cash and marketable securities at the end of the Q1 were $462,000,000 With net cash of $93,000,000 Cash flow from continuing operations was $32,000,000 compared to $10,000,000 last year. Inventory increased $26,000,000 or 7% sequentially on higher raw materials as a result of lower revenue And increased finished goods on timing of customer shipments. We expect these finished goods to largely ship through in the Q2. As a result, inventory days were 135 and turns decreased from 3.3 in Q4 to 2.7 in Q1. We saw a corresponding increase in DPO, which increased to 62 days. Speaker 400:15:10DSO was also up slightly to 62 days on timing of customer shipments late in the quarter. During the Q1, we invested $16,000,000 in CapEx, slightly below our expectation for 2023 of approximately 4% of sales. We also made debt principal payments of $5,000,000 and paid $3,800,000 in dividends. Turning now to our guidance. The demand environment continues to be mixed across our markets. Speaker 400:15:41As we noted last quarter, We expect our semiconductor revenue to decline again in the Q2 in the mid teens sequentially. At the same time, We expect Q2 semi revenues to be the trough for the year, with second half revenue being flat to up versus the first half. In our other markets, we expect revenue in aggregate to grow sequentially in Q2 as we secure additional critical components. As a result, we are forecasting our 2nd quarter revenue to be approximately $410,000,000 plus or minus $20,000,000 We expect gross margin in Q2 to be in the low 36% range on anticipated mix and lower volumes, partially offset by a modest improvement and material cost premiums. We expect gross margins to remain at or above this level in the second half of the year. Speaker 400:16:36As we stated last quarter, we expect Q2 operating expenses to increase $2,000,000 to $3,000,000 sequentially due to annual salary changes, Inflation and continued R and D investment. However, we anticipate OpEx to moderate slightly in the second half of the year As we see the benefits of our actions to control spending, while maintaining investment in critical R and D and growth initiatives. As a result, we expect Q2 non GAAP earnings per share to be $1 plus or minus $0.25 Before I open it up for questions, I want to highlight a few important points. First, our diversification strategy is working. Record revenue in our industrial and medical market and solid demand across most of our non semi markets partially offset the anticipated weakness in the semiconductor market. Speaker 400:17:27As a result, we are able to deliver year on year revenue growth for the Q1. 2nd, as component availability gradually improves, We are well positioned to improve gross margins as we exit the year, enabling more meaningful leverage in our model in 2024. Lastly, we believe our strong cadence of new products will lead to more business for Advanced Energy over time, enabling us to grow share and exit the downturn stronger. As a result, we continue to believe we are well positioned to perform better than our markets this year, Deliver results substantially better than in previous cycles and to gain share and grow earnings as the markets improve. With that, let's take your questions. Speaker 400:18:13Operator? Operator00:18:17Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question Our first question comes from Quinn Bolton with Needham and Company. Please proceed with your question. Our first question is from Quinn Bolton with Needham and Company. Operator00:19:01Please proceed with your question. Speaker 500:19:03Hey, guys. Can you hear me now? Speaker 600:19:07Yes, we can hear you. Yes. Speaker 500:19:08Okay. Sorry, I was on mute. I just want to say congratulations on the nice results. I wanted to start with the industrial and medical business, which looks Like it's very strong, especially on a year over year basis. Can you just give us some more color about some of the drivers for that business, Both in the near term and based on your current backlog, how sustainable do you think this industrial demand will be this year? Speaker 700:19:36Yes. Thanks, Quinn. This is Steve. Yes, we're very enthusiastic about the industrial medical part of our business. We started really focusing Industrial Medical over the past year and a half. Speaker 700:19:47So we've put a lot of new engineers in place to develop products faster. We also reorganized our sales force to call on more industrial medical accounts directly. So we're seeing the results of that and record design win activity. And also we're seeing quite a bit of cross selling activity in the medical space Based on our purchase of SL Power about 1 year ago. I think the nice thing about I and M, Industrial Medical, It's very broad based. Speaker 700:20:19So even though one segment may be down, another part of that market could be up. So it tends to be pretty stable. Right now, we have a significant industrial medical backlog, which is overdue. So we believe over the next couple of quarters, we'll be able to ship more of that overdue backlog based on increased development parts. So we're very optimistic about that part of our business in 2023. Speaker 500:20:47Excellent. And then for Paul, I guess just a question on the Material cost headwinds to gross margin, are they still in the sort of 250 to 300 basis point range? Is that the right kind of Headwind to be thinking about? Speaker 600:21:04Yes, Quinn, I think the certainly, we've seen a little bit of improvement on that front. When we look at it this quarter, it's probably in the 150 to 200 basis points if you look at the absolute number. Now part of that's Captured inventory, so it will flow through, you'll call that lower numbers, captured inventory, so it will flow through over the next quarter or so. But it Seems to be early signs as it seems to be coming down. Our best view continues to be what we said last quarter is that we expect that these costs will Continued debate over the course Speaker 300:21:35of the Speaker 600:21:35quarter and we should be able to exit the year, hopefully at a place where we're seeing most of these costs working their way out of our P and Speaker 500:21:44L. Perfect. Thank you. Operator00:21:49Our next question comes from Krish Sankar with TD Khan, please proceed with your question. Speaker 300:21:56Yes. Hi. Thanks for taking my question. I had a couple of them. First one is actually is a 2 part question, Both for you, Steve and Paul. Speaker 300:22:02Number first part is, you spoke about Smedes revenues dropping in Q2 And then improving, I'm just kind of curious what gives you the confidence. And the second part of the question is, last quarter, if I remember, there was probably $85,000,000 to $90,000,000 from back Well, that got removed because of the China export controls, but some of your customers spoke about shipping back to some of the lagging edge Memory Chinese customers. So I'm kind of curious how to think about how much of that backlog comes back into your backlog? And is that Part of the reason why you feel comfortable about the second half revenue improving. And then I have a follow-up. Speaker 700:22:44Hey, Chris. This is Steve. I assume we're talking just about the semiconductor part of our backlog. Is that correct? Speaker 300:22:49Yes. Yes. Speaker 700:22:50Okay. Yes. So we do believe the second half will be stronger than the second quarter. And so we're We're bullish on that because we've seen the backlog increase. And I think part of that increase is due to some of the clarifications that our customers have received about shipping into China. Speaker 700:23:09So we've seen some strengthening in the backlog in the second half. I think the other part of it is, we do see our continuing pockets of strength We'll be benefiting us in the second half as well as the first half. We talked about our service business. The other one that's very exciting for us is the high voltage business. As the demand for ion implant applications is very strong And that's being led by the expansions in capacity for silicon carbide and other power type processes. Speaker 600:23:44Yes. Krish, I think the other factor is, we expect Q2 is kind of our trough because we've completed Basically, the selling of inventory to our customers, which has helped us, frankly, the last two quarters kind of buffer the lower market Conditions, so we think that's largely washed through. As we look at the second half, our customers are talking about stronger trailing edge and They are selling into China, which we believe will benefit us as well. Speaker 300:24:14Got it. Is there a way to quantify how much of this $85,000,000 to $90,000,000 backlog that got removed because of China gets back in? Speaker 600:24:23Yes, we haven't quantified that Publicly at this point, what we've put in the backlog at this point, I'd say, is quite limited where we have direct Line of sight to customers that we have a verification process in place to ensure that nothing's going to any leading edge applications. So it's pretty limited at this point. And I suspect it will kind of drop in a little bit over time as we're able Make sure we have good visibility to where product is Speaker 300:24:53going. Got it. Got it. Thanks for the call. And then just as a follow-up on supply chain. Speaker 300:24:58You kind of mentioned that there's still constraints on the MAF system power ICs and it should probably update by the end of the year. I'm kind of curious, like, we've kind of been like 2 years or a little more 2 years into this thing. And It doesn't seem like your customers are having that issue of component constraints, but you're still having it. I'm just curious, Like, is that specific to just those few semiconductor devices and that is impacting and Does it mean that you have to figure out whether to ship it to semi customers, INM customers, hyperscalers? Or is there something else that's going on that In general, because it seems like some industry is going through a cyclical downturn. Speaker 300:25:44So I'm just kind of curious and people are all willing capacity, Yes. Here we are 2 years later talking about supply constraints. Speaker 700:25:52Yes. I think, Krish, it's a legitimate complaint. We wonder the same thing sometimes. But quite frankly, the list has narrowed considerably over the past 2 years. So, it's a much more compact list. Speaker 700:26:03However, And all it takes is one missing power MOSFET or one missing power IC and we can't ship the box. So we continue to compete with other industrial customers and automotive customers for this trailing edge capacity. But based on what we're experiencing now, what we see in the second half, we think that we'll be over most of these issues by the end of this year. Operator00:26:35Our next question comes from Steve Barger with KeyBanc. Please proceed with your question. Speaker 800:26:41Hey, thanks. Steve, I know driving strong customer engagement is a priority for the year, and I think you're focused on small and medium sized customers because of the growth rate. First, how are you measuring engagement? Is it just having a dialogue? Is it based on actual sales conversion? Speaker 800:26:59What metric are you managing to there to drive Speaker 700:27:04Yes. Good question, Steve. And I think about that in 2 ways. 1 is customer pull for new products. And with our large semiconductor customers, like I said, they're fully engaged with the 2 new platforms that I discussed earlier in the call. Speaker 700:27:22These are technology leading products and the customer pull is equal to the supplier push, Which is always nice to see. I think in Speaker 200:27:31the larger Speaker 700:27:32markets, what I've seen is with our increased rate of new product launches, We see a lot of excitement in the field, around the world actually. And we measure that every month in our design win funnel. And so we basically look at all the opportunities that are out there that we're trying to close. And right now, our closure rate is approaching 40%, which is pretty good In my experience. So, the number is high and the closure rate is excellent. Speaker 700:28:02So that's how I measure customer engagement. Speaker 800:28:05And when you think about that 40% closure rate, how like is the pool of potential touch points growing Every quarter, so that 40% part of the pie is on a growing pie on a consistent basis? Speaker 700:28:23Yes, it's a growing pot because in the past, we have not focused on industrial medical accounts. So just in the past year and a half, I think we've done some significant things. Probably the most significant thing is Goline have our sales force on industrial medical design wins and revenue. And so they're very, incented to go after new opportunities That's small and medium sized accounts. Again, it's a really great investment for us because, generally speaking, these Design wins, although they're smaller, they tend to last a long time and they tend to be sole source. Speaker 700:29:02And so It's a nice market for us. And it's one of 3 markets we really focus in on, semiconductor, industrial and medical. Speaker 800:29:13Yes. And just one follow-up on that. Given the size of the industrial and medical opportunity and your focus on it, How are you thinking about organic growth for that segment on a normalized basis? I mean, through cycles Can it be a double digit grower on a regular basis? And over time, can it catch up to semi equipment in terms of size? Speaker 700:29:36We haven't articulated the specific growth metrics, Steve, but I've got very high hopes of business. We think it is an excellent business to be in and it buffers us during these semiconductor downturns, which will continue to happen moving forward. We're seeing some of the benefits of that strategy this year. So I anticipate the industrial medical business will continue to grow. We have a lot of room to grow in that space. Speaker 700:30:02And with a little focus in energy, I don't see a problem doing that. Speaker 800:30:08Great. Thank you. Operator00:30:35We have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.Read morePowered by