Advanced Energy Industries Inc Q2 FY2020 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Advanced Energy's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to our speaker today, Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Sir, please go ahead.

Thank you, Michelle. Good morning, everyone. Welcome to Advanced Energy's second quarter 2020 earnings conference call. With me today are Yuval Wasserman, our CEO; Paul Oldham, our CFO; and Brian Smith, our Director of Investor Relations. If you have not seen our earnings press release, you can find it on our website at ir.advanced-energy.com. There you will also find a slide presentation to follow along with our discussion today. Before I begin, I would like to mention that Advanced Energy will be participating in multiple investor conferences in the coming months. As events occur, we'll make their announcements. 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 for future performance. Information concerning these risks and uncertainties is found in our filings with the SEC. All forward-looking statements are based on management's estimates, projections, and assumptions as of today, August 5, 2020, and the company assumes no obligation to update them. Long-term targets presented today, which include our aspirational goals and the integration targets should not be interpreted in any respect as guidance. On today's call, our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. An explanation of our non-GAAP financial measures, as well as reconciliations between GAAP and non-GAAP measures, can be found in our press release today. With that, let me pass the call to our CEO, Yuval Wasserman. Yuval?

Thank you, Edwin. Good morning, everyone, and thank you for joining us on this call. This was a good quarter for Advanced Energy, with strong demand across several of our markets and solid execution, which enabled us to deliver financial results at or above the high end of our expectations in a continued challenging environment. The strength in demand is fueled by multiple technology trends that are driving the data economy in the fourth industrial revolution that result in an acceleration in adoption due to COVID-19. In line with our growth and diversification strategy, the acquisition of Artesyn has extended our exposure to these trends and verticals, and we are ahead of plan in driving the integration of the combined company and achieving our synergy goals. Our pure play power strategy focus in our integrated functional organization provides us with the synergy, operational excellence, and capabilities, which allowed us this quarter to deliver sequential growth in three of our four market verticals, resulting in revenue of $340 million. We generated non-GAAP EPS of $1.18 above our guided range, and our highest operating cash flow in two years. In the midst of the current global pandemic, we continue to put the safety and health of our employees and our communities first. At the end of the second quarter, all of our major manufacturing sites had returned to a near-full capacity operating within hand safety protocols and physical separation that are above and beyond local government requirements. Our supply chain continues to improve, but we still see some bottlenecks that require proactive action to manage shortages and on-time delivery of raw materials. With the increasing global cases of COVID-19, the environment is very dynamic and unpredictable, and our results may continue to be impacted more by operating conditions and capacity than by underlying demand. Turning now to our markets and performance. Demand from the semiconductor market grew once again in the second quarter, driven by continued strength in foundry/logic applications and improved demand for memory applications, particularly in NAND on the transition to higher-level accounts. Since reaching the cyclical trough in the second quarter of 2019, our sales into the semiconductor market grew by 61% year-over-year, outpacing the WFE and our peers. This strong performance confirms our market share gains, the increased power content in leading-edge applications, our expanded product portfolio and the normalization of customers' inventories. With memory investment in this cycle remaining well below the last, we believe that we're well positioned to continue to outgrow the industry when memory investments resume. Looking into the third quarter, we expect our sales into the semiconductor market to continue to grow. As a leading innovator in semi-power solutions, we continue to deliver groundbreaking technologies and products to enable our customers' innovation. At the recent SEMICON West, we introduced three new process power products and a new configurable embedded power supply. The process power products are being evaluated by multiple customers for ALD, ALE, advanced conductor etch, and PECVD process for leading-edge logic and memory devices. The Embedded Power supply, iHP, is the latest of our broad portfolio of configurable power supplies and is a high-power, multi-output system that can be used for multiple auxiliary power applications in both front-end and back-end tools. We expect successful evaluation of this product to drive additional cross-selling revenue and expand our addressable market within semi. Beyond new products, our leading technology continued to generate new design wins and market share gains. Design wins we announced previously have resulted in RF Match revenue in Q2 that is almost double year-over-year. In addition, recently we shipped several units of our own most advanced triple-frequency Navigator RF Matching Network. Our focused efforts in remote plasma sources continue to drive growth each quarter as our superior process performance and long chamber lifetime resonate with customers. Finally, recent design wins in etch and dry clean applications continue to strengthen our position at Korean OEMs. In our industrial and medical markets, revenue grew sequentially driven by strong demand in medical applications, improved ability to deliver products from our ramping factories and initial recovery from the product transition by a large customer we discussed in Q1. Although we grew sequentially, macro weakness exacerbated by COVID-19 continues to limit the overall industrial market. Within this environment, Q2 was one of our strongest quarters for medical products, as very strong demand for COVID-related critical care and medical applications more than offset weakened demand in elective and cosmetic procedures. In addition, we won multiple new designs for applications ranging from DNA sequencing and mobile X-ray to surgical microscopes. Looking forward to Q3, we expect revenue in the industrial and medical verticals to grow sequentially supported by ongoing demand in medical and our improved production capacity. Revenue in our data center computing market was down slightly from record levels last quarter, with continued sequential growth in hyperscale, offset by lower enterprise computing revenue due to supply constraints. Overall, data center computing grew 89% year-over-year on a pro forma basis and hyperscale was up more than 5x over last year's pro forma level, due primarily to our market share gains. In addition, we began shipping production units to a third major hyperscale customer this year, as we secured a leading position in its common data center platform. With a third major hyperscale customer, we remain confident and believe that the second half of 2020 revenue in data center computing will remain close to the robust levels seen in the first half, assuming our manufacturing capacity is not affected by future waves of COVID-19. At the OCP Virtual Summit in May, we launched our next-generation power shelf, which is designed to support the data center infrastructure migration to 48-volts. We have seen increased interest in our power shelf solutions from a widening group of data center customers, ranging from gaming and retail to consumer internet and international cloud service providers. With growing demand for artificial intelligence applications, AI data center racks are projected to consume up to 7 times more power than traditional data center racks. We believe our industry-leading power conversion efficiency and our continuing innovation in data center rack power architecture will both drive our growth and play a critical role in helping the industry reduce electricity consumption. Beyond data centers, our industry-leading power efficiency and power density will be important enablers for improving energy sustainability across many industries. Recently at SEMICON West, our customers, Applied Materials, announced its SuCCESS 2030 initiative. Advanced Energy is one of the six strategic partners working with Applied toward a more sustainable supply chain. By advancing our energy-efficient products and our environmentally-efficient operations, we are adhering to our commitment to sustainability leadership. Finally, demand from our telecom and networking markets increased from the first quarter as these markets appeared to be reaching a bottom. In addition, revenues in the second quarter benefited from high-volume shipments of several prior design wins across multiple customers. While investment in global telecom infrastructure continued to be delayed by COVID-19 and geopolitical tension, strong demand for data center networking is generating increased sales for our products. During the quarter, we executed a next-generation interconnect router design due to our industry-leading power density. Looking into the third quarter, we expect to see revenue maintained around these levels. Long-term, global deployment of 5G infrastructure will drive new requirements for more advanced power systems. To summarize, our operational excellence and execution allowed us to capitalize on strong demand from our customers and increase revenue. As a pure play power leader, we grew our market leadership, introduced innovative new products and realized the synergistic benefits of the Artesyn acquisition. While COVID-19 is still affecting macroeconomic and operating conditions, this crisis is also accelerating the adoption of the technologies behind the fourth industrial revolution, potentially increasing the long-term organic growth rate in our core markets. Overall, we're executing our strategic plan to grow faster than our markets and to accelerate earnings growth. And we are making good progress towards achieving our long-term aspirational goals of over $1.5 billion in revenue, over $6.50 non-GAAP EPS and over 23% ROIC. I'd like to thank our customers, shareholders, partners, and our valued employees for your support, especially during these challenging times. I look forward to speaking with many of you in the upcoming quarter. With that, let me turn the call over to Paul. Paul?

Thank you, Yuval and good morning, everyone. Before I begin, please note that all financial measures presented today will be on a non-GAAP basis, unless otherwise stated. Excluded from non-GAAP results are amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains and losses, and restructuring items. This quarter, we recorded $5.8 million in restructuring costs related to the transition of manufacturing from Shenzhen to Malaysia, and other actions associated with synergies related to the Artesyn acquisition. We also recorded $1.1 million in non-cash unrealized FX losses related to long-term lease and pension liabilities. A full reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today. In our second quarter, we delivered outstanding financial results, exceeding expectations and guidance for revenue, gross margin, operating margin and cash flow generation. Our team's strong execution in the challenging environment enabled our non-GAAP EPS to be above our widened range and our annualized return on invested capital to increase to over 20%. Cash increased by $28 million, and we generated additional synergies from the integration of Artesyn. Second quarter revenue was a record $340 million, up 7.7% from $315 million last quarter and up 152% from $135 million a year ago. On a pro forma basis, including a full quarter of Artesyn revenue in prior periods, Q2 revenue grew 24% year-over-year with strong growth in semiconductor and data center computing markets, partially offset by declines in industrial and medical, and telecom and networking. Excluding Artesyn, organic revenue grew 11.5% sequentially and 34% year-over-year to $180 million. Turning to revenue by market, sales in semiconductor in Q2 were $145 million, up nearly 9% from the strong first quarter and up 61% year-over-year. On an organic basis, semi revenue grew 60% year-over-year with strong demand from foundry logic and higher investment in NAND memory. Semi product sales were up over 9% sequentially and 88% year-over-year. Semi service revenue also grew about 9% from last quarter but declined 8% from last year due to COVID-19 related capacity constraints in some of our service centers. Overall, our semiconductor revenues have grown faster than WFE and the vast majority of our peers, both year-to-date and year-over-year in Q2. Revenue from our industrial and medical markets was $71 million, up 14% sequentially as a result of growth related to critical care medical devices, increased thin film market demand and our improved ability to deliver products. On a pro forma basis, revenue declined 23% year-over-year driven by general macro weakness in several of our industrial sectors, exacerbated by the COVID-19 crisis. Data center computing revenue was $83 million, down 3% from the exceptionally strong first quarter, but up 89% year-over-year on a pro forma basis. Hyperscale continued to grow, offset by lower enterprise revenues mainly due to capacity constraints in our Philippine facility. Telecom and networking revenue was $40 million, up nearly 20% sequentially on solid shipments of our design wins. On a pro forma basis, revenues declined almost 14% year-over-year as the global telecom infrastructure investment continued to be impacted by the pandemic. Non-GAAP gross margin for the quarter expanded almost 100 basis points sequentially to 38.7%. Margins benefited from a substantially better than expected product mix and material costs and positive other cost-of-sale items, partially offset by increased costs related to COVID. In addition, we improved factory utilization overall and are beginning to see the impact of some of our synergy actions. Although we do not expect all of these favorable items to repeat next quarter, we continue to make steady progress on our goal to improve overall gross margins to greater than 40%. Non-GAAP operating expenses were $77.8 million, up $3 million from last quarter, primarily related to increased R&D investments and variable expenses associated with the higher revenues. Expense as a percent of sales improved almost 100 basis points, demonstrating the synergy and leverage in our model and at under 23% of sales is in the top quartile of our competitors, even as we continue to make critical investments to drive growth. Non-GAAP operating income improved to $53.8 million and 15.8% of revenue. Non-GAAP other expense was approximately $500,000, down from $3.5 million last quarter, primarily on the timing of an insurance claim and subsequent recovery and on lower net interest expense. We expect total other expense to be in the $1 million to $1.5 million range going forward. Our non-GAAP tax expense was $7.9 million, or 14.7%, primarily as a result of integrating Artesyn into our structure and favorable mix of foreign earnings. Looking forward, we expect the GAAP and non-GAAP tax rates to remain around 15% to 17%. Non-GAAP earnings for the quarter was $1.18 per share, up 30% from $0.91 last quarter on higher revenue and margins. EPS was up over 150% from $0.45 a year ago. The Artesyn acquisition continues to contribute positively to our consolidated results. The acquisition was solidly accretive in Q2, adding over $0.30 per share to non-GAAP earnings, including the interest expense of financing, and as at the end of Q2, realized synergies to date were over $20 million. As a result, we have largely achieved our Phase 1 synergy goals after the first three quarters, well ahead of our original plan of 18 months to 24 months. As we integrate Artesyn, we have found new opportunities to further improve our costs, allowing us to reinvest part of the achieved synergies into R&D to drive faster long-term growth, while keeping our long-term operating margin goal of over 20%. Based on the great progress we have made, we remain confident in meeting or exceeding our long-term targets of $40 million of annualized synergies and $1.50 per share in EPS accretion. Turning now to the balance sheet, we ended the quarter with cash and marketable securities of $383 million, up $28 million from Q1. Operating cash flow from continuing operations was $38.6 million, our highest level since Q2 of 2018. Receivables increased on higher sales and DSO rose by one day to 62 days. Inventory increased by $25 million and turns were 3.2 times, reflecting investments we made to manage risk in the COVID environment. Payables were $180 million, representing 77 days of DPO. Total days of net working capital were 97, up six days from last quarter. Capital expenditures for the quarter were $7.3 million and depreciation was $6.6 million. During the quarter, we repaid $4.4 million of debt and ended with total bank debt of $331 million, resulting in gross debt leverage of 1.8 times. We did not repurchase any shares during the quarter. Now, let me turn to guidance. In the near term, we continue to see strong demand in our semiconductor market and anticipate continued modest improvement in industrial and medical. We expect demand in the data center computing and telecom and networking markets to fluctuate at around the current levels. However, we continue to see changes in the environment related to COVID-19 as many governments re-implement certain levels of quarantine. Factoring in the limited visibility and ongoing operating and macroeconomic risk related to COVID, we are guiding Q3 revenue to $350 million, plus or minus $25 million. Based on anticipated mix, volume and ongoing COVID-related costs, we expect non-GAAP gross margins to be in the 37% to 38% range, up 150 basis points from last quarter's guidance as we gain more traction on our synergy and structural improvements. Operating expenses are expected to be about flat, including increased engineering investment related to a new advanced dielectric etch evaluation program with a strategic OEM. As a result, we expect non-GAAP earnings at $1.15 per share, plus or minus $0.25. To summarize, we delivered a great quarter operationally and financially with record revenues, improvement in gross margin and operating margins, and almost 30% sequential increase to our non-GAAP earnings. Our pure play power strategy is enabling us to capitalize on market and technology trends across many of our verticals, accelerate growth, and realize synergy and operating benefits ahead of our plan. We are well on our way to building the business and financial model of a top-tier industrial technology company and we are on track to meeting or exceeding our stated long-term aspirational goals. With that, we will take your questions.

Thank you. Our first question comes from the line of Tom Diffely with D.A. Davidson. Your line is open. Please go ahead.

Yes. Good morning. Thank you for taking my question. So first, I'm curious as we ramp up the semiconductor business right now, you mentioned it's obviously a combination of markets and share gains, but I'm curious if you are seeing the beginnings of an inventory increase at your customers yet, or is that still to come?

I can't comment on that. I don't think we have enough visibility to report on our customers' inventory.

Yeah, just…

I apologize.

I was going to say that through the cycle typically, inventory targets bled off when things slowed down, but then you outgrow the market because both your end markets go up faster and also there is a build in the channel. So, maybe not specifically for customers, but just in general, are you seeing a build of your tools in the marketplace from an inventory point of view?

Yeah, Tom. As Yuval said, it's hard for us to have exact visibility to our customers. But I can say that we continue to see steady pull. Our bin sizes, our levels aren't really changing, so we're not seeing an increase in inventory in the bins. And our sense is our customers are consuming inventory at the rate we're shipping it.

Yeah, we don't see any abnormal behavior, Tom, and our demand continued to be strong and we're very constructive towards Q3 in semiconductor.

Great. And then, Paul, when you look at the new products, what do you think the impact will be on margins over time as they start to become more accepted in the marketplace?

Well, generally, our new products, Tom, have more innovation, more capability, in semi, more power or accuracy. And as a result, we expect to sustain or grow our margins with our new products as we've done historically.

Another comment related to that, Tom, as we develop new products, we rely on a future combined organizational platform. There is a combination of the traditional AE and the Artesyn very efficient operation. So we expect to benefit from much more efficient manufacturing and lower-cost manufacturing for our future products.

Great.

Some of these products will be vertically integrated.

And, of course, as we transition the product portfolio and complete the synergy activities with Artesyn, all of these things will contribute overall to our ability to continue to drive gross margins higher and above our goal of 40%.

Okay. And then finally…

And we’re making great progress towards that.

Yeah. Okay. And finally, Paul, you mentioned that there were some supply constraints. It seemed like that was more centered around the data center business. I was wondering if you could explain here, why hit that segment of your market more than the rest?

Yeah. I think, as you look at, at this point, our factories are largely up and running, but we still have point issues with supply. You noticed our inventory was also up this quarter. Part of that was an effort to make sure we had adequate supply to meet our customer needs. But you still need a full kit to ship products. In this case, that particular market and a few products there were impacted the most by supply constraints in the factory and material.

Okay. Thanks for your time.

Thank you.

Thank you. And our next question comes from the line of Quinn Bolton with Needham & Company. Your line is open. Please go ahead.

Hey, guys. Nice job on the results and the guidance. Paul, I guess I'm scratching my head a little bit on the gross margin guidance. I know you guys had a much stronger gross margin in the second quarter. But when I look at the revenue mix shift in Q3, it sounds like semiconductor, which is your highest gross margin business, is going to be growing the fastest, so and overall revenue was up, so you should get better absorption in the factories. I'm just trying to understand why margin could be down 120 basis points at the midpoint.

Yeah. It's a good question, Quinn. This quarter, as I explained, we had pretty much everything go right. Obviously, we had COVID costs, which were unfavorable, but that continues. So as we look forward, we just don't see all of those things continuing to fall to the right side. And although semi is up, our mix within our overall product portfolio in the different product categories hasn't much impact as just one market or another. And so on balance, when we look at the operating activities in the third quarter, we do see margins down a little bit. I'll also note that while our factories are largely up and running, we are focused on reducing inventory and we have inventory positioned in the hubs and other areas, which we expect to draw down, which is part of the revenue increase in Q3, not necessarily all higher factory output.

Got it. Understood. And then, I guess just looking towards, with revenue guided to about $1.4 billion. On an annualized basis, it looks like you guys are well on your way to your aspirational 2022 goal. Just wondering, if you had any updated thoughts. I mean, it certainly seems like you're tracking to that kind of target perhaps even before 2022. But just as you look out, WFE I think is expected to be up high-single digits to 10% next year. In that kind of environment, how would you look at that aspirational goal and how close do you think you can get next year?

Good question, Quinn. And as we do almost every year, our intent is to update our long-term goals as we complete our strategic planning process. And within the next few months, we will find the right platform to announce our updated goals.

Great, we will look forward to it. Congratulations again on nice results.

Thank you very much.

Thanks, Quinn.

Thank you. And our next question comes from the line of Amanda Scarnati with Citi. Your line is open. Please go ahead.

Hi. Good morning. First question I have is on the data center side of the business, and I just want to clarify that I heard a comment correctly. I think you mentioned that the data center business was down and partly due to capacity constraints. Can you just talk about how that business is doing and if you're seeing more of an impact from demand or more of an impact from capacity constraints? And if you expect that at demand or the constraints to recover anytime in the near term?

So more specifically about the demand part of the capacity part of the question, this specific revenue stream that goes into data centers, not the hyperscale, was more affected by capacity constraints related to COVID-19, mainly in Philippine factories, as I think, Paul, you said. We continue to see the market continue long-term to be strong. We said we expect in general to be at the same level going forward, while hyperscale will grow at a much faster rate for us, because of our continuing market share gain and adding more customers of hyperscale giants to our list of customers. And that will take, as you know, very similar to what we see in other capital equipment related sales, it requires working closely with customers, with their engineers, going through the qualification and evaluation and certification, and at that point, we migrate into a ramp. And we are right now, we believe that we are practically in the third inning of our journey into hyperscale. So we expect long-term to continue to benefit from our growing presence and to grow faster than the market. Long-term, there is no doubt that the data center hyperscale world will grow as the use of data and the need for storage of data will continue to grow. The underlying demand is very strong. We may see fluctuations, mainly affected by COVID-19, in general, digestion period of this very large data centers, but we are very excited about our future as a fast follower to the market from two years ago. We're getting tremendous momentum and continue to gain design wins, primarily because of our very advanced power density and power conversion efficiency.

Yeah, that's right. I'll just note that, quarter to quarter, we can see some variation due to new customers and supply issues. However, it's important to remember that this business is up 89%, nearly double what it was a year ago, and even compared to late last year. We are maintaining these much higher levels of business and expect that to continue.

Okay. And then on the industrial and medical side of the business, are you seeing any sort of increase in or speeding up rather of qualification times, due to COVID and needing to get new products to the market, or was the increase that you saw in medical really due to existing things that you already had in the pipeline?

I'm not sure if we see a dramatic change in the evaluation time of our products in medical. I think we obviously saw a very mixed picture recently due to the increase in demand for our products, or solutions that are directly related to COVID-19, like respirators or gene sequencing tools. We continue to look at the medical application space as a growth engine for us. We are benefiting from the need, the current need for more capacity, but we also have new design wins that go into diagnostic and therapeutic applications that are not related to COVID-19. To give you like a calibration, I think we grew our medical revenue from $50 million to $75 million?

Yeah, we're about $75 in the quarter.

Yeah. We're at $75 million right now. And last time we talked about it, we were over $50 million. And we expect to continue to grow in this area. This is an area of investment of interest. It has all the attributes that we like to see in the target market. Customized solutions for critical applications, sticky relationships with customers, and once you get designs in and qualified, it becomes a long-term annuity.

Great. Thank you.

Thank you. And our next question comes from the line of Mehdi Hosseini with Susquehanna. Your line is open. Please go ahead.

Yes. Thank you for taking my question. I joined the call late, so I apologize if I'm asking a question that has already come up. A couple of big picture items. I go back to the targeted goals of more than $1.5 billion of revenue and pro forma earnings of $6.50. So you are, on the revenue side, if I just looked at your June quarter and annualized it, you're not that far from a targeted revenue. But on the EPS, perhaps there is some catching up and that has to do with additional leverage that is realized due to a better cost structure. Is that the right way to think about what you did and how you're tracking against these long-term goals?

Let me talk about revenue. Yeah. Let me talk about the revenue, Mehdi. As I said earlier, I think maybe you came late to the call. We anticipate updating our long-term aspirational goals within a few months after we finish our strategic planning process. And as we said earlier multiple times in Q1 and this quarter, we're making progress, really great progress towards our long-term goals. And I think in some aspects of the plan, we are ahead of plan. We are ahead of plan in the integration of Artesyn; we are ahead of plan in that growth rate. So when it comes to updating the future projection of the company, we will provide that within a few months. About gross margin, do you want to maybe talk about that?

We are making significant progress in the market. On the revenue side, we are getting closer to our goals. Our model is based on full synergies, and we're achieving our Phase 1 synergy goals faster than expected, completing them within the first three quarters instead of the anticipated 18 to 24 months. However, we still need to meet our Phase 2 goals to enhance our earnings per share. Overall, we are in a good position, slightly ahead of our plan. We are benefiting from quicker revenue growth, especially in data centers where we've recovered and increased our market share. We will continue to focus on executing our synergy plan and improving business leverage over the next few quarters, aiming for our long-term objectives.

I want to add a point, Mehdi. I don't anticipate our business development to be straightforward. We operate in a dynamic setting, especially now with significant fluctuations due to COVID-19. However, it's important to highlight that, as mentioned in our prepared remarks, we are intentionally investing more in R&D for critical growth areas. At times during our long-term strategic planning, we made decisions aimed at future expansion. As we indicated today, we have increased our R&D expenditures to pursue unique growth opportunities in the semiconductor etch area, collaborating closely with key OEMs. We've opted to boost our R&D spending. As I mentioned earlier, we are optimistic about our capacity to achieve our long-term objectives, but the path may not be straightforward.

It's impressive how your challenges have evolved over the past year, leading to more positive issues. This brings me to my next question about your recent improvement in net cash per share. What are your plans for that, assuming this trend continues? Additionally, I'm curious about your outlook on semiconductor revenue for the next year, particularly if the memory mix improves since that's your strength. I anticipate ongoing growth, but I would appreciate your perspective on that, as well as your thoughts on how to utilize the cash.

Yeah. Let me start with our capital deployment. We were very open and clear about our capital deployment strategy. And we will continue to focus on actively looking for additional acquisitions. We will address obviously doing a great job deleveraging our debt, and we periodically review internally and with our Board whether or not we would like to execute on opportunistic shares buyback and other returns to shareholders. We have a strong deleveraging power and cash generation power, and our intent is to deploy our capital. When it comes to long-term semiconductor projections, listen to our customers at SEMICON West and reading some of you guys' reports, we're very constructive about the future, and we believe that long-term, 2021 is perceived and expected to be a strong year for semiconductors. And obviously, we will be benefited from that, not only because of the fact that we will grow with the market, but we continue to gain market share. We continue to cross-sell embedded power products into semi. We continue to increase our SAM, and for that reason, we continue to focus on our mission to grow faster than the markets we serve.

Thank you.

Thank you. And our next question comes from the line of Krish Sankar with Cowen & Company. Your line is open. Please go ahead.

Yeah. Hi. Thanks for taking my question. I had a few of them. Yuval, is there a way you can characterize or quantify what your market share on the semiconductor side is between NAND and DRAM?

We never look at that, that way. And we never dissected our market share between DRAM and NAND. Some of our products end up on our customers' machines that may end up to either/or logic or memory or DRAM and NAND, not always we know exactly what the target application is within the fab. So I don't believe we have that.

Got it. No worries. And then on the data center side of your revenues, is there a way to characterize what percentage of your data center revenue is from hyperscale?

We haven't broken that out at this point, Krish.

All right. No worries. And then just a final question for Yuval. When you look at hyperscale and look at some of the telecom and networking site, my understanding is that most of them are going towards like 48 volts on the equipment side. Do you actually see the products merging down the road between hyperscale and telecom, or do you think there is still going to be a distinct difference between the two?

We see some talks about cross-pollination. Right now, from our perspective, we are excited and focused on the migration to 48 volts in data center hyperscale. And we bring to the table unique technical advantages that came with the Artesyn innovation and engineering teams, more specifically related to power conversion efficiency and power density, which means basically you can increase the power without dramatically increasing your footprint or your volume of the box, and that means a par density. Related to that, the ability to go to market quickly with innovative and leading solutions, as a time-to-market plays an important role here. As we go from a fast follower into a leader, enabling customers with time-to-market, we also believe that our margins will improve.

Got it? Thanks, Yuval.

Thank you.

Thank you. And our next question comes from a line of Pavel Molchanov with Raymond James. Your line is open. Please go ahead.

Thanks for taking the question. Kind of a core key regulatory issue. Now that Hong Kong is no longer treated independently under US law for trade purposes, I'm curious if you have any customers in Hong Kong or purchasing through Hong Kong that may be affected by the technology transfer restrictions?

Yeah. We don't have any large customers that we service out of Hong Kong. Obviously, we have operations there. There are transactions that flow through there. But we don't see any change or impact to us as a result of the recent changes from a day-to-day or transaction activity.

Understood. Okay. That's good to hear. And then a balance sheet question. You're continuing to pay down pretty modest amounts for $0.4 million of debt per quarter, but obviously you have $380,000 of cash on the balance sheet. Is there any rationale for accelerating the debt paydowns, since that is one of your stated goals for capital allocation?

Yeah. It's a really good question, Pavel. And as you've seen, we have brought the debt down modestly. Our view as the environment has changed with the lower interest rates. And frankly, our ability to lock in extremely favorable financing is that we don't anticipate bringing that debt down very quickly. We'll see how interest rates go. But as you recall, with the swap we put in place earlier in Q2, our net cost or our total cost of debt is around 1.25% or lower. In that rate environment, we don't see really an advantage to accelerating the debt payback beyond the modest amounts we've been doing.

Okay. And then just a quick one on your geographic sales mix. Latin America right now stands out as the hardest-hit global region from the pandemic. I'm curious what exposure, if any, you have to customers in Mexico and the South American region?

Certainly, South America, I'd say, is quite small. There is some, mostly from embedded power products and Mexico, there is certainly some exposure because we have customers that have for embedded power that have operations in Mexico. But all in, it would be our smallest of our various regions.

Okay. Thanks very much.

Thank you.

Thank you. And I'm showing no further questions, and I would like to turn the conference back over to Yuval Wasserman for any further remarks.

Thanks, everybody, for joining us today. We had a great quarter, despite COVID-19. We continue to outperform and do better on the short-term and long-term plans, excited about the projection of the company and the future of the company. And I'm looking forward to talking to many of you during the quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.