Advanced Energy Industries Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 11 speakers on the call.

Operator

Greetings. Welcome to Advanced Energy's Second Quarter 2024 Earnings Call.

Speaker 1

At this time, all participants will

Operator

be in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Mr.

Operator

Mok, you may now begin.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's Q2 2024 Earnings Conference Call. With me today are Steve Kelly, our President and CEO and Paul Odom, our Executive Vice President and CFO. You can find our earnings press release and presentation on our website at ir.advancedenergy.com.

Speaker 1

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, July 30, 2024, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non GAAP financial basis unless otherwise specified.

Speaker 1

Excludes from our non GAAP results are stock compensation, amortization, acquisition related costs, facility expansion and related costs, restructuring and asset impairment 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 2

Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. 2nd quarter revenue and earnings per share exceeded our guidance. Strong demand in the data center market as well as a pull in of demand in the semiconductor market drove sequential revenue growth of 11%. Data center revenue grew 74% sequentially as we benefited from strong investments in AI.

Speaker 2

Our high efficiency, high power density products are well suited for AI servers, which require significantly more power than conventional servers. In Industrial and Medical, revenue was down slightly as customers continue to work through pockets of inventory. However, distribution sell through of our industrial medical products increased in the Q2. Since roughly half of our I and M business goes through the channel, this is an encouraging data point and could indicate that we are close to reaching a bottom in the I and M market. Design activity is extremely robust across our product portfolio.

Speaker 2

We are working intensively with a wide variety of customers to integrate our precision power products into their leading edge systems. Our healthy design win pipeline is expected to drive profitable revenue growth and share gain as markets recover. To accelerate innovation across multiple markets, we acquired Arity Technologies. Arity is an innovator in high voltage power with a focus on efficient, high density, gallium nitride based solutions. Prior to the acquisition, we work closely with Arity on several joint development projects and feel very good about the technology and talent that Arity brings to Advanced Energy.

Speaker 2

In operations, we are taking advantage of reduced factory loading to accelerate our consolidation efforts. At the macro level, we are reducing our factory footprint in China, the U. S. And Europe, while upgrading our factories in Malaysia, the Philippines and Mexico. Overall, we believe our factory actions will enhance operational productivity, lower fixed costs and improve product quality.

Speaker 2

The consolidation effort is a key part of our plan to cross the 40% gross margin threshold in 2025. In the short term, we are operating in a dynamic market environment where forecasting can be a challenge. Because it's important for us to respond quickly to sudden changes in customer demand, we are maintaining staffing levels and strategic inventory, which give us added flexibility. Now let me provide some color on each of our markets. 2nd quarter semiconductor revenue increased 5% sequentially and exceeded our projections.

Speaker 2

Based on customer requests, we accelerated some deliveries into the Q2. We believe that these expedites were largely due to increased AI demand. On the new product front, we are working closely with our key customers to qualify the EVOS and EVOS platforms for next generation etch and deposition processes. This qualification activity will migrate from development labs to wafer fabs over the next few quarters. We are expediting delivery schedules to meet this strong demand and now expect to ship more than 200 systems before year end.

Speaker 2

We believe the acceptance of these new platforms will drive share gains in both logic and memory applications. At Semicon West, we launched the NAVX RF Matching Network, which pairs directly with our Everest RF generator. The combination features differentiated pulsing capabilities, which enable our customers to deliver best in class etch and deposition performance and advanced process nodes. Initial customer feedback has been quite positive and we expect to have up to 50 NAVX units in the field by year end. Industrial and medical designing activity is very strong with multiple wins recorded in the Q2 across a wide range of industrial applications, including glass coating, test and measurement and battery production.

Speaker 2

In medical, we secured important slots in diagnostic and therapeutic applications, including wins in surgical robot systems at 4 different customers. Many of these wins are enabled by the modularity of our latest technology platforms, which enables quick customization to meet specific application needs. Finally, our new website is popular with industrial and medical customers. Web traffic has tripled over the past year and an increasing number of website inquiries are turning into design wins. In data center computing, our revenue upside was driven by strong demand from both hyperscale and enterprise customers, mainly for AI applications.

Speaker 2

We continue to believe that increased AI demand will drive robust revenue levels for several quarters. During the quarter, we won a major AI related design at a leading hyperscale customer and expect to begin ramping that win to production later this year. Telecom and networking revenue increased slightly quarter over quarter. We expect market conditions to remain soft over the next few quarters given high customer inventory levels and a slow recovery in demand. Now for some closing thoughts.

Speaker 2

This year is playing out roughly as planned. We still expect revenue levels to be higher in the second half than the first half, even after some revenue pull ins into the second quarter. In semiconductor, we expect 2024 revenue to be similar to 2023 and second half revenue to be better than first half. In data center, we expect 3rd and 4th quarter revenue driving year on year growth. In Industrial and Medical, we expect that revenue will remain under pressure through the Q3 and into the 4th as channel and OEM inventories gradually return to normal levels.

Speaker 2

Looking beyond 2024, we are confident in our ability to drive profitable revenue growth. As new design wins ramp to volume, we expect to benefit from a richer product mix. In addition, the cost benefits of our factory consolidation effort will begin to flow through our P and L later this year and continue into 2025. Finally, we expect improved market conditions will drive higher revenue and utilization moving forward. Long term, however, the most important factor driving our growth will be how our customers view advanced energy.

Speaker 2

At Semicon West earlier this month, I had the opportunity to meet with nearly all of our major semiconductor customers. As a group, they are enthusiastic about how we are bringing new products to market. Development time for Everest and Evo's derivative products is now measured in weeks enabled by our modular architecture. A few weeks ago, we received a top 3 supplier award from 1 of our largest data center customers. This was very meaningful for us since we were top 3 out of more than 1,000 suppliers.

Speaker 2

The award called out our operational execution, high quality, innovative design and management commitment. Finally, we are receiving positive feedback from our major distributors who are key partners in our drive to gain industrial and medical share. They feel that AE has become an easier company to do business with and are steering more business our way. With that, I'd like to turn it over to Paul, who will provide more detailed financial information.

Speaker 3

Thank you, Steve, and good afternoon, everyone. 2nd quarter revenue increased 11% sequentially to $365,000,000 ahead of our guidance of $350,000,000 driven by strengthening demand in the data center computing market and pull forward of demand in semiconductor. Gross margin was up slightly quarter over quarter and operating margins improved 270 basis points as we continue to manage our cost structure closely. As a result, we delivered earnings of $0.85 per share above our guidance of $0.73 Overall, 2024 is playing out as we anticipated with full year revenues and earnings expected to be in line with or better than what we communicated last quarter. As Steve mentioned, we are leveraging the current environment to accelerate our plans to consolidate our manufacturing sites.

Speaker 3

We now plan to fully close our last production site in China with final production completing in the first half of twenty twenty five. Although this action will result in higher transition costs in 2024, it will enable us to further lower our fixed cost structure and increases our confidence to achieve and sustain gross margins of over 40%. Now let's review our financial results in more detail. Total revenue was $365,000,000 up 11% sequentially, but down 12% year over year. Revenue in the semiconductor market was $188,000,000 up 5% sequentially and 9% over last year.

Speaker 3

Solid execution to meet customer needs enabled us to deliver results above our guidance. Service revenue was roughly flat from last quarter. Industrial and medical revenue of $79,000,000 decreased 5% sequentially and 38% from last year's record levels due to continued inventory destocking at both OEMs and distributors. Data center computing revenue was $73,000,000 up 74% quarter over quarter and 24% year over year, well ahead of our guidance. The upside was mainly driven by strong demand for AI server power solutions from both our hyperscale and enterprise customers.

Speaker 3

Telecom and networking revenue was $25,000,000 and increased slightly quarter over quarter. Gross margin was 35.3%, up 20 basis points sequentially and slightly better than our guidance. Gross margins benefited from higher volume, which more than offset the anticipated impact of less favorable mix. Operating expenses were $95,000,000 up $1,600,000 from last quarter on higher R and D to support our customer qualifications of our new platforms. Operating income for the quarter was $34,000,000 Depreciation was $10,000,000 and our adjusted EBITDA was 44,000,000 dollars Other income of $4,000,000 decreased sequentially primarily due to lower interest income.

Speaker 3

With our interest rate swap expiring in early September, we expect other income to be around $3,000,000 for Q3 $1,000,000 for Q4. For Q2, our non GAAP tax rate was 15.9%, below our target of 17% to 18% due to geographic mix of earnings and favorable discrete items. We expect the tax rate to be 16% to 17% for the balance of the year. For 2025, we expect the full adoption of the global minimum tax regime to increase our tax rate to 18% to 19%. 2nd quarter EPS was $0.85 per share compared to $0.58 per share in the previous quarter and $1.11 per share a year ago.

Speaker 3

Turning now to the balance sheet. Total cash and cash equivalents at the end of the second quarter were $986,000,000 with net cash of $79,000,000 The sequentially lower cash balance was partially due to the Arity acquisition, which closed on June 20. Cash flow from continuing operations was $7,000,000 primarily on higher inventory and annual tax payments made in the quarter. Inventory increased $22,000,000 or 6% sequentially, driven by strategic inventory investments and higher revenue. Turns improved slightly to 2.5 times.

Speaker 3

DSO decreased slightly to 65 days, but receivables increased by $50,000,000 on higher revenue. DPO increased 2 days to 60 days. During the Q2, we invested $14,800,000 in CapEx and we continue to expect 2024 CapEx to be approximately 4% of sales. We also made debt principal payments of $5,000,000 and paid $3,800,000 in dividends. As noted earlier, this quarter we acquired Arity Technologies, providing us with new capability for high density, high voltage power applications.

Speaker 3

We paid net cash of approximately $13,800,000 excluding customary indemnity holdbacks and issued approximately 144,000 shares over a 3 year period to retain the critical talent in the organization. Turning now to our guidance. We expect 3rd quarter revenue to be up slightly from Q2 on continued strengthening in data center computing. We expect semiconductor to be roughly flat despite a higher Q2 and industrial and medical and telecom and networking to remain at similar levels quarter over quarter. As a result, we're forecasting our 3rd quarter revenue to be approximately $370,000,000 plus or minus 20,000,000 dollars We expect gross margins in the 3rd quarter to improve to around 36%, mainly driven by the initial benefits of our manufacturing consolidation As a result, we expect Q3 non GAAP earnings per share to be $0.90 plus or minus $0.25 In addition, we expect to recognize $25,000,000 to $30,000,000 mainly in the 3rd quarter in one time severance and other exit costs related to the closing of our last factory in China.

Speaker 3

Before opening it up for questions, I want to highlight a few important points. We expect 2024 results to be in line with or slightly better than what we communicated last quarter. We continue to expect semiconductor to be up in the second half and flattish for the year. AI investment is driving strength in data center computing, which should continue for several quarters. We expect that customer inventory destocking will continue to impact Industrial and Medical through Q3 and into Q4.

Speaker 3

Telecom and networking appears to have stabilized in the low $20,000,000 range for the next few quarters. Finally, we expect gross margins to increase as we execute our manufacturing cost optimization plans and volumes improve. With the closure of our last China production plant, we expect slightly higher transition costs over the next couple of quarters, but we will be in a stronger position to meet our long term gross margin goals as markets recover in 2025. Beyond the near term, we have multiple drivers supporting revenue growth. We believe our new products and design wins are creating opportunities for share gain as volume production begins to ramp in 2025.

Speaker 3

These new products, combined with an improving market environment and normalization of customer inventory levels, should translate to solid growth next year. By investing prudently to enable long term growth and scale, we expect to deliver leverage in our operating model and accelerated earnings growth. Finally, we have an active pipeline of potential acquisitions. We are targeting acquisitions that align with our strategy and are committed to financial discipline to create shareholder value over time. With that, we'll take your questions.

Speaker 3

Operator?

Operator

Thank you. We'll now be conducting a question and answer And our first question is from the line of Joe Quiraci with Wells Fargo. Please proceed with your questions.

Speaker 4

Yes. Thanks for taking the question guys. Maybe one on the industrial side or industrial and medical. Can you just talk about your forward visibility and just the visibility in the channel inventory? Based on your guidance, it seems like maybe revenue is going to stabilize kind of in this current level.

Speaker 4

And how do we think about the trajectory beyond that and looking into 'twenty five?

Speaker 2

Yes, Joe, this is Steve. I'd be happy to answer that question. Maybe just go back to Q4 of 2023, that's when we started to see the correction in industrial medical. So we're about 10 months into the correction. And so what we do is we track the inventory and distribution very closely.

Speaker 2

We track the sell in the distribution, we track the sell through and then we track inventory. So the good news is inventory is steadily declining in the distributor channel. Resales were up in Q2 after a sharp decline in Q1. And as we look at the trend lines, these metrics, we think that we reach a supply demand balance somewhere in the Q4 2024 or Q1 2025 timeframe. So we're getting close.

Speaker 2

And I think it's a good indicator for us because roughly half of our INM business goes through distribution. So that's what I think. Think 2025 is going to be a decent year based on the fact that we have a very strong design win pipeline in both industrial and medical. And so I think a lot of those designs are going to ramp into production next year.

Speaker 3

Got it. That's helpful. And as

Speaker 4

a follow-up, as we're thinking about the recovery in gross margin as we exit this year, I think in the past you guys talked about kind of a revenue target of $400,000,000 exiting or in 4Q trying to get back to the I think 37.5% to 38 percent gross margin. When we think about the mix of that revenue and the strength maybe in AI relative to maybe a little bit weaker outlook in I and M. How do we balance that from a gross margin perspective? Is that revenue level to reach that kind of range of gross margin still the right way to think about it?

Speaker 3

Yes. We commented on this last time and I think generally that's right, around $400,000,000 we're going to be in that range we discussed last time. I think there's a few variables. Obviously, mix can affect it a little bit. Higher data center or our high volume product revenue would be a little bit negative mix for that.

Speaker 3

We saw that a little bit both this quarter and the reverse of that in Q1. But in general, the gross margin on those products has come up over time as we've implemented our strategy and focused more on the differentiated part of this market. So the impact of mix on our products might be in the 50 to 70 5 basis point, if you saw something that was heavily balanced one way or the other. So there could be a little headwinds from mix around that level. But I think we'll show good progress.

Speaker 3

The other thing is that we announced of course that we're going to fully close our remaining production site in China, which will be a good thing. It actually allows us to get more fixed cost out of the equation. It gives us better leverage as markets recover because of that. It will cause a little bit of headwinds. Those aren't significant, but it will cause a little bit of headwinds because we'll carry a little extra cost as we ramp up basically other sites to carry that last bit of production that will be coming out of China.

Speaker 3

So on balance, we expect margins to improve through Q3 and Q4. I think in general, the model that we gave last time is in the right neighborhood. And there could be some benefits If semi is a little stronger, we may have a little bit of headwinds and then depending on where revenue ultimately comes into Q4, I think that could help us or it could be a little lower. In general, we're on track, we believe, to get to our over 40% gross margins roughly by middle of next year assuming markets recover as we've discussed. All of our sort of factory actions should largely completed by that time.

Speaker 3

I think we'll have a cleaner fixed cost structure, which will give us again more leverage as revenues grow from that point. And we feel good about the progress that we're making.

Speaker 1

Helpful. Thank you.

Operator

Our next question is from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question.

Speaker 5

Hi, thanks. Good afternoon. Question on the data center business. In terms of visibility, how far does it extend? Does it go extend beyond Q4?

Speaker 5

You gave some directional guidance on that.

Speaker 2

Yes, Jim, this is Steve. The hyperscale business, it's interesting, it's a cyclical business. So we've gone through a few of these cycles. And what we've seen every time is after a period of inventory digestion, the market is strong for typically 4 to 5 quarters. So right now, we believe that the momentum in hyperscale will take us through at least Q1 if not Q2 of next year.

Speaker 2

At the same time, we're gaining market share in some of these AI applications. So we think hyperscale is going to stay strong perhaps for most of 2025.

Speaker 5

Okay. Thanks, Judy. That win that you highlighted, does that hyperscale customer for that AI design, does that contribute in meaningful in Q4 or is that more initial revenues and then it scales in early 2025?

Speaker 2

I think the best way to view that win is probably as a replacement for older technologies that are phasing out. So this is a pretty fast lifecycle market. Typically these technologies ramp and then decline within the space of a couple of years. But this is an important one because it's associated with artificial intelligence. And so typically, we have roughly 50% to 60% more dollar content in those racks than we do with conventional server racks.

Speaker 2

So as we move forward, we're going to see more and more of these AI type applications in hyperscale. And it's important for us because many of our differentiators really come into play as the power levels go up. And the AI servers consume a lot of power, typically 3 to 5 times the power consumption of conventional server racks. So our efficiency becomes very important to customers. Our power density, the ability to put a lot more power to roughly the same size box become extremely important to our customers.

Speaker 3

Jim, just quickly, typically as I said before, as we're winning these applications, they're typically better margin than our historical margins in this market. So I think it contributes positively.

Speaker 5

Okay. I appreciate that color both beyond that. Just the final question for me is just on the pull ins that you alluded to. I don't know if you can quantify that or you can say whether that which area did that come from memory or any color on some of those pull ins? I

Speaker 3

think we commented that I think there's kind of a pull across the board from an AI perspective. So I think it's for applications that would support that. It's hard for us to assess exactly the timing of these things, Jim, but we definitely saw some customers accelerate activity into the Q2. And we'll see the carry through on that. Obviously, we still feel that our semi our product selling into semi overall will be up in the second half still despite that pull in and flattish for the full year.

Speaker 3

So we'll see how that carries through, but definitely we saw some acceleration from a couple of

Speaker 5

customers. Okay. Thanks a lot.

Operator

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

Speaker 6

I had 3 quick questions. First one is for you Paul. You gave some color on the $400,000,000 run rate. I'm kind of curious, so are you willing to underwrite that $400,000,000 run rate in 4Q and the 37.5% to 38% gross margin you said before? The reason I'm asking is because it seems like if you step up from the midpoint of September quarter guidance.

Speaker 6

And if so, how to think about that run rate and how it parlays into calendar 25 for revenue and gross margin? And then I had 2 other questions. Thank you.

Speaker 3

Yes, it's a good question. Last quarter, we talked about some estimates for the Q4 largely trying to get to an annual number. We also said at the time it's hard to handicap each of the quarters. Other than that we expected each quarter to grow from the previous quarter. So at this point, 1, we don't typically guide more than a quarter out.

Speaker 3

Secondly, we still feel good about the full year to be the same or better. And we expect Q4 to be higher. How exactly that will play out between Q3 and Q4, I think is a little bit yet to be seen, particularly given the dynamics that Steve discussed in industrial and medical. So I think again we feel good about kind of the implications of being around $400,000,000 From a margin perspective, I think the structural elements are there. Things that could affect that a little bit plus or minus are going to be mix.

Speaker 3

A little bit of headwinds related to higher transition costs related to closing our Zhongshong plant, but that will be a net positive in the long run.

Speaker 6

Got it. Thanks for the call. And then Steve, I'm kind of curious on kind of like the cycle. How do you see the shape of the recovery? Clearly, it's not a D shaped recovery, yet there's a lot of optimism on next year.

Speaker 6

I'm kind of curious, what do you think of the drivers? And also, is there a way to figure out at what quarter would that inflection happen to see the cyclical recovery or is that really tough to prognosticate?

Speaker 2

Yes. Chris, let me just ask a clarifying question because you're kind of coming in and out. Were you talking about AE as a whole or semiconductor only?

Speaker 6

On the semiconductor side of AE.

Speaker 2

Okay. Yes, semiconductor. Okay. So what we're seeing is a gradual recovery in 2025. I think we've been dealing with 2 issues in semiconductor over the past year and a half.

Speaker 2

The first is obviously demand inflection, but the other issue has been inventory. So I think the good news is we think we've just about worked through the inventory issues downstream and we think we'll be completely out of the inventory issues by the end of this year. So 2025 will be fully connected with end customer demand without any inventory influences. What we see in 2025 is an acceleration in the second half in particular, because we believe a lot of these units, these EVOS and EVOS units we're shipping into our customer development labs and ultimately into wafer fabs this year. We're going to see a ramp in those products as early as the second half of next year.

Speaker 2

And so basically two things together. The first is the market gradually recovering, but we see an acceleration based on our market share gains in plasma power.

Speaker 6

Got it. Very helpful. Steve, I think if I just squeeze one last. In the past you've spoken about like from a technology standpoint, the opportunity for advanced energy in gate all around for conductor edge. Is there a better size of opportunity, for example, like the customers have spoken about how much dollar it is for 100,000 data start a month.

Speaker 6

Is there a way to kind of figure out what advanced energy opportunity is with this gate all around conductor edge for every 100,000 laser starts or what are the metrics you want to use? Thank you.

Speaker 2

I wish there was, but right now we don't have that formula. So what we're doing is pushing full speed ahead on both conductor etch and dielectric etch because we think our technology now is a good fit for both applications. So we think in the current course and speed that we can increase our share in conductor etch where we're already the leader and we also break into dielectric etch in a big way. So that goes from almost nothing to a significant percentage over the next few years.

Speaker 6

Thanks, Pete.

Operator

Our next question is from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Speaker 7

Thanks. For the semi equipment guidance, you said flat sequentially in 3Q and a flat year versus 2023. I think that implies 4Q could be down a bit on a year over year basis. And can you just square that up with the accelerated delivery request in 2Q and the idea that inventory is pretty much out of the channel by year end?

Speaker 3

Yes. I think our math shows flattish in Q3 would be an up quarter in Q4 if you just went to a completely flat year. Obviously, we said flattish. With the dynamics in the market, there's pluses and minuses. If we have a slow recovery, that could be a little bit better.

Speaker 3

If we things push out, we'd still feel good about kind of seeing some growth in the second half of this year. So I think, Steve, just checking that, we feel like it is up half in the second half and Q4 would be higher than Q3 as we see it today, assuming Q3 is flattish with Q2. And remember, Q2 was higher. So all of that commentary is on a higher base, right?

Speaker 7

It's on a higher base, but it kind of imply even if you're up a little bit in 4Q, it's kind of a flattish trend in the last three quarters of the year, right? So I'm just trying to but you expect a more linear acceleration in 2025 if I'm hearing you right?

Speaker 3

Yes, I think that's right. That's based on a gradual market recovery as different parts of the market recover better in the second half as Steve described because of kind of the ramp of some of these new technologies. The only thing I'd say Steve is look the one thing we know about this market is that we don't know. And historically when the semi market recovers, it recovers quickly and it's hard to predict the timing of that. So at this point, we're trying to plan prudently at the same time make sure that we have the inventory and people available to respond quickly to customer needs.

Speaker 3

Frankly, we were able to do that this quarter because we were prepared and we're able to accelerate some shipments in from a couple of customers. So we'll continue to be prepared and then monitor how the market goes.

Speaker 7

Got it. And my follow-up is also for the semiconductor business, but related to industrial. It seems like the message from a lot of the auto and industrial semiconductor companies is that the trough is here in 2Q. Do you think the industrial chip cycle is a good leading or concurrent indicator for the industrial equipment cycle that you're diversifying into? Or are those two things not really related?

Speaker 2

I wouldn't call it a tight relationship. As I view the market, I think it's important to figure out when you went into the supply chain crisis and when you came out of it, right? And then that kind of determines when you reach equilibrium again. And so for us, in I and M, Industrial Medical, we came out of that supply chain crisis in Q4 last year. So we're 10 months into it.

Speaker 2

That's why I think we're going to be out of it in Q4 of this year or Q1 of next year. It seems like a reasonable amount of time and the trends support that thesis. I think in semiconductor, it's been a year and a half now, right? I think the industry went negative in Q1 of 2023. And so I think we're seeing a point here towards the end of this year where things will probably turn around again.

Speaker 2

So I think like Paul said, it's a best guess, but it's based on historical data, It's based on trends that we're seeing. And we're not that great at forecasting downturns or upturns, but they do tend to be a little sharper both ways than we first estimated.

Speaker 7

Understood. Thanks.

Operator

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

Speaker 8

Yes, thanks for taking my question. This is for the team. I'm trying to understand your readiness and to what extent can you support customer before building backlog again. So if I were to take your guide for semi, which is about 190 ish, would you be able to get it back to the prior pickup $270,000,000 without having to accrue backlog? In other words, your ability to maintain the term business for the semi business unit?

Speaker 8

And I have a follow-up.

Speaker 2

Mehdi, I'll start and I think Paul will finish this one. But in semi, a significant part of our business goes through inventory hubs or just in time operations. So we don't really have much of a backlog. But what we do is we track the size of the bins that our customers specify. And obviously, as their business picks up, they want more from us, they pull more from those inventory hubs.

Speaker 2

I think in the I and M business, the industrial medical side, which is not your question, but I'll make a comment anyway. I think the backlog is more significant. But again, it's different than the past few years because the lead times are much shorter today. They're typically anywhere between 8 to 12 weeks. And in past years, they've been up to a year, right?

Speaker 2

And so our visibility is pretty short term in industrial medical today. So that forces us to make some bets and put some inventory in place so we can react quickly.

Speaker 3

I think maybe to expand on that, Mehdi, I think the question is how fast is the recovery? If it's a sharp recovery, then it's more challenging. Having said that, we've invested in strategic inventory, particularly on some of the challenging or long lead parts so that we can respond quickly and we've made sure we've kept adequate workforce to respond quickly. So it will depend on the pace. Certainly, we have the capacity to be at the prior peak or higher.

Speaker 3

No question about that. And we're trying to the goal is to manage our material strategies so that we can be pretty responsive to changes in demand.

Speaker 8

Sure. Thank you. And as you can imagine, we can never predict the shape of the recovery or downturn. It was only 2 years ago that your OEM customers couldn't get enough. And then after 2 quarters, they couldn't cut back fast enough.

Speaker 8

And I'm just trying to better understand how you and your OEM partners have been able to capitalize on their learnings over the past couple of years to be able to adjust. And given the fact that back in semicon, everybody is positive about the prospect of growth in 2025, but nobody is planning for it. And I'm just was trying to determine your readiness. I wonder if you have any follow-up before I move on to my second question.

Speaker 2

Yes. I would say it's a pretty important topic for us and our customers, right? And we all acknowledge that these upturns are fast and furious essentially. And so what we've done is put in place some strategic inventory of piece parts in particular. One thing we do know based on the past few years is which of the piece parts are most problematic, right?

Speaker 2

The ones we haven't replaced with alternatives, we've taken some insurance in the form of strategic inventory, so we can respond to a quick upside. The second aspect is staffing. So we could have certainly cut back more in our factories given the current loading, but we chose not to because what we see is quite a bit of demand comes in late in the quarter. And so we have to flex up typically in the last month and a half of the quarter.

Speaker 8

Got it. Thank you for trying. And then, Paul, you talked about some increase in OpEx. Would 2 to 4 quarter of increase per quarter, especially looking to 25 be reasonable? And then as a second follow-up to that, given this increase in your CapEx this year, I think your CapEx is on target to increase by a couple of 1,000,000.

Speaker 8

Should I assume that you're done with investment, especially resizing and next year your CapEx would actually be down on a year over year basis?

Speaker 3

Yes. So on OpEx, I think we said last time we expected OpEx to be up $1,000,000 to $2,000,000 each quarter sequentially through the end of this year. I think that's consistent with the guide we gave again this quarter. Next year, certainly we have normal merit inflation cycles. But in general, our base operating cost structure should stay pretty level.

Speaker 3

So we'll have variable costs that go with that, very selective hiring is all and normal inflation. So that's a little bit how you should think of it. In general, we'd expect to grow revenue at half the rate I'm sorry, grow expenses at half the rate of sales growth. Now if sales grows quite quickly, again, we don't need to scale up. We can get a lot of leverage out of our expense structure.

Speaker 3

From a capital perspective, we are running ahead because we're doing these factory transitions. We're investing in NPI tools and capability with our new products coming. And we have some infrastructure investments we're making in systems and tools as we've talked about. So I think these largely conclude sort of the middle ish to late next year. So certainly as you go out in time 12 to 18 months, we'd expect to see our CapEx revert back towards kind of a 2% to 3% rather than a 4% of revenue.

Speaker 8

Thank you,

Speaker 5

guys. Thank

Operator

you. Our next question is from the line of Scott Graham with Seaport Research. Please proceed with your questions.

Speaker 9

Yes. Hey, good afternoon. Thanks for taking the question. Well done quarter. I have several questions and I hope they're easy and quick so

Speaker 3

I can get to all 3 or 4

Speaker 6

of them.

Speaker 9

The T and N business, the telecom business, we all know telecom is a weak market, but is that a business where we're at a level of revenue now where maybe we're thinking more strategically, it doesn't make sense? Or are we thinking that there's going to be a big pop in this thing at some point and we're going to kind of get back? I mean, the sales of the business are more than 40% down. And I just kind of wondering what your longer term thinking on this thing is. Can this pop back up?

Speaker 3

Yes, I think you captured the dynamics pretty well. And for a while, we've said that this market isn't one that has a lot of growth. It's kind of a sustained business. We did see a pretty big ramp the last couple of years, bait coming out of the supply chain crisis. So it's down a lot, but it was up a lot.

Speaker 3

Both of those I think were kind of unusual. So it is getting back towards maybe a bottom now and a steady state might be a little higher than this. But look in this market like others, we have some marquee customers. We have some places where we can focus, where we think we make reasonable returns. And all of these markets, they have a lot in common.

Speaker 3

We share common architecture, common products, common manufacturing. So it's not something that's easy to sort of carve out. Rather we're able to capitalize on kind of the whole to have a reasonable business. It's not one we want to grow a lot or think we can because of both the market and again focusing on what we think the returns are reasonable. But it's I wouldn't say we strategically would expect to divest of this product.

Speaker 9

Thank you for answering that so succinctly. The data centers business, Steve, you indicated it should be up strong in the next couple of quarters. I guess I'm just wondering why not longer, maybe not at the pace of this past quarter, but is it are your customers saying something that is giving you a little bit of hesitance to not go beyond next couple of quarters? Is there I'm just wondering because I believe that look every I would say that this market is going to be growing fairly strongly for the next several years as in 3 to 5 type of things. So I'm just wondering why you limited your comments in the next couple of quarters?

Speaker 2

Yes. Let me just clarify. We think data center is going to be strong into 2025. And I think you're right, long term trends are very positive. I mean, more and more data generation, storage, transmission.

Speaker 2

So it's nowhere to go but up over time. But this is a cyclical market. And so typically after a digestion period, which we just exited Q1 of this year, we're going to have at least 4 to 5 quarters of really strong revenue. And so that's about as much as we're willing to forecast right now. But I think given the trends towards AI and some of our market share gains in specialty areas within hyperscale, there's a chance we could sustain this type of revenue level through 2025, but I'm not going to venture right now and say that we will for certain.

Speaker 9

Okay. Thank you. That was great. I just maybe want to go back and revisit the answer to a previous question when I think Jim was trying to unbundle the growth in the semiconductor market or somebody else. I'm just curious as to aside from sort of the pull forward that you're talking about, logic versus memory, I mean any more color you can give on give in your business maybe again away from that pull forward, why it feels like you're a little bit more optimistic there?

Speaker 2

Yes. I think it's difficult for me to add too much to the market commentary that's already out there. There's a lot of prognosticators who forecast what's happening in NAND and DRAM and logic and so forth. But what I can say is that with our new technologies, EVOS and Everest and now NAV X, which was just introduced earlier this month at Semicon West. We are working very closely with our customers to secure tool of record status on the leading edge memory and leading edge logic processes.

Speaker 2

So this is very, very important. And we mentioned it during the scripted part of the call. But let me just repeat, today, we have orders for over 200 of these EVOS and Everest products this year, right. And so we're hustling to deliver these products to our customers. And in turn, they're working with their customers to get these technologies qualified in wafer fabs and in production as soon as the second half of next year.

Speaker 2

So we see some trends that are very favorable for Advanced Energy. Some of those are connected to market growth next year, but some are independent because it enables us to gain share, particularly in leading edge.

Speaker 9

That's great. Thanks, Steve.

Operator

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

Speaker 10

Just wondering if you could quantify the effect of lower factory loading on your margins?

Speaker 3

I think you said lower factory loading, is that right, Mark? That's correct. Yes. What we've said maybe the reverse of that is that we think that there's roughly 50 basis points of margin improvement I'm sorry, 100 basis points of margin improvement for roughly every $50,000,000 of incremental revenue. So you could certainly anticipate that on the downside as well.

Speaker 3

That's been the biggest contributor recently why we haven't seen a pickup in margins as material costs got better, is because revenues have been lower. So I think that's the way to think about it, Mark.

Speaker 10

And the impression I've gotten from the call and the questions is that in terms of semiconductor bookings and backlog, it's kind of flattish or is it better than that?

Speaker 3

Again, there's not really a backlog concept in semi because so many of our customers pull from jet bins. But generally, we think that the inventory rationalization were largely through that and that we're generally shipping kind of at demand levels, particularly as we go through the balance of the year. And that this market will bounce around here and should trend up over time. It's hard to call that in the very near term, but we feel really good about all these markets have been in a downturn for a while, and we have a great set of new products coming that should accelerate growth as things recover.

Operator

Thank you. Yes. Thank you. This will conclude our question and answer session. This will also conclude today's conference.

Operator

Thank you for your participation. You may now disconnect your lines and have a wonderful day.

Powered by Quartr
Earnings Conference Call
Advanced Energy Industries Q2 2024
00:00 / 00:00