Greetings. Welcome to Advanced Energy's Fourth Quarter 2023 Earnings Call. Please note, this conference is being recorded. At this time, I'll turn the conference over to Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Mr. Mok, you may now begin.

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's Fourth Quarter 2023 Earnings Conference Call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. You can find our earnings press release and presentation on our website at ir.advancedenergy.com. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, February 06, 2024, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as items. On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excluded from our non-GAAP results are stock compensation, amortization, acquisition-related costs, facility expansion and related costs, restructuring and impairment charges, unrealized foreign exchange gains or losses and one-time tax benefit. 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 Kelley.

Thanks, Edwin. And to those on the line, thank you for joining the call. Fourth quarter revenue of $405 million met our guidance, while earnings per share of $1.24 surpassed our guidance. We delivered record cash flow of $85 million in the fourth quarter. Over the full year, we delivered record cash flow of $213 million by maintaining good profitability and reducing inventory. For the full year, we benefited from diversified end market exposure, even though our semiconductor revenue was down about 20% in 2023. Revenue in our other markets stayed flat. In total, our revenue declined roughly 10% in 2023, a significant improvement over our performance in previous semiconductor downturns. In the semiconductor market, we enjoyed record sales of high-voltage products in 2023. We also achieved record revenue in our service business due to a growing installed base of subsystems in a broader portfolio of services. In our other markets, we achieved yearly revenue in the industrial medical space and successfully ramped a major hyperscale product to high volume. Across the company, we launched 20 new platform products in 2023. Many of these platforms are viewed by our customers as game changers. In semiconductor, we launched eVerest and eVoS for etch and deposition applications. In the industrial medical space, we recently launched NeoPower, our new flagship configurable power platform. We are working closely with our customers to adapt and customize our platform products to meet the specific requirements of high-value applications. We achieved a record number of design wins in the semiconductor, industrial and medical markets in 2023. Exciting new products, a motivated sales team, and enhanced go-to-market strategies enabled these wins, which are a critical leading indicator of future growth. On the manufacturing front, we took advantage of softer loading to accelerate our factory optimization plan. We are executing a multi-year plan to consolidate all of our manufacturing into large factories in Southeast Asia and Mexico. Ultimately, we expect this consolidation to improve manufacturing efficiency and execution, and it's a key part of our effort to move margins above 40% in 2025 as markets recover. In the fourth quarter, we completed the closure of two small factories. These closures were in addition to the Shenzhen factory we closed earlier in the year. Now I'll provide some color on each of our end markets. Fourth quarter semiconductor revenue increased 3% sequentially to $191 million, a bit better than expected. In the fourth quarter, shipments of eVerest and eVoS, 80 units increased sharply, and we are maintaining that strong pace in the current quarter. Customers are eager to evaluate the new technologies, which offer significant yield and throughput advantages for advanced process nodes. Also in the fourth quarter, we delivered an upgraded higher flow version of our MAXstream remote plasma source product. In the industrial medical market, fourth quarter revenue decreased 6% sequentially to $109 million. Production ramps of new design wins partially offset macro headwinds. We continue to grow our industrial design win pipeline in the fourth quarter, securing wins in robotics, test and measurement, and indoor farming applications. In the medical market, we won multiple designs in surgical and diagnostic applications. During the quarter, we launched our next-generation NeoPower family of configurable power supplies. Addressing the need for higher power in a smaller form factor, NeoPower offers best-in-class power density to our industrial and medical customers. Investments in the channel and our digital platform are helping to broaden our customer base and are expected to drive future market share gains in the industrial medical space. We are doing a better job communicating our value proposition to customers across all of our markets. When customers buy from Advanced Energy, they get access to leadership technology, quick-turn customization capabilities, a world-class manufacturing footprint and long-term service and support. Moving on to our data center computing and telecom and networking markets. Fourth quarter revenue from data center computing customers totaled $63 million, down 8% sequentially. The softness in the enterprise market was partially offset by the volume ramp of our sole-source hyperscale product. Telecom and networking revenue was $42 million, up slightly from last quarter on strong year-end telecom shipments. Looking forward, we see broad-based market weakness in the first half of 2024, followed by second half improvement and further strengthening in 2025. Softening demand in the trailing edge part of the semiconductor market, sluggish demand in the industrial medical market, and ongoing weakness in the enterprise computing market are all contributing to a sequentially lower first quarter. Despite these short-term markets, our strategic focus remains unchanged. We will continue to invest in proprietary products and technology, and we will accelerate improvements in our operational efficiency. Our focus areas for 2024 include: first, maintaining the momentum we've built in new product launches and design wins. New products and technologies are at the heart of our plan to grow revenue and share in the coming years; second, we will continue to broaden our customer base and expand our presence at existing customers. Our new website is the centerpiece of this effort. Since the site went live 6 months ago, our web traffic and engagement levels have more than doubled. Later this quarter, we will add e-commerce to the website, making it even easier for customers to quickly evaluate our products. Third, we will continue to improve our operational efficiency and optimize our factory footprint. In addition, we will continue to control costs as we did in 2023. Finally, we have a strong balance sheet, and we'll continue to look for inorganic growth opportunities that make strategic and financial sense. Looking beyond 2024, I remain very confident in our plan to accelerate revenue and earnings growth as markets recover. We are focused on high-value markets with a great team of innovative scientists and engineers, supported by a highly focused sales, marketing, and operations team. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. In the fourth quarter, we delivered revenue of $405 million at the midpoint of our guidance in a tightening environment. Good execution throughout the organization resulted in Q4 earnings of $1.24 per share at the higher end of our guidance range. In addition, we delivered record operating cash flow of $85 million and exited 2023 with cash in excess of $1 billion. As we projected, our backlog returned to a normalized level of $407 million. Given shorter lead times and the transition of many of our customers back to utilizing hub or jet bins rather than direct orders, we expect our backlog to remain a quarter of revenue going forward. Now let me go over our results in more detail. Revenue in the semiconductor market was $191 million, up 3% sequentially. Product revenue increased quarter-over-quarter to meet end-of-year customer requirements, partially offset by lower service revenue on low fab utilization. Sales into the industrial and medical market were $109 million, down 6% sequentially. As we began to see in Q3, increasing macroeconomic weakness impacted overall demand in Q4, partially offset by revenue from design wins we secured in prior quarters. Data center computing revenue of $63 million, down 8% sequentially. Our business in this market can be lumpy, and we continue to benefit from the ramp of the large hyperscale win we reported in Q3, partially offsetting further weakness in the enterprise server market. Telecom & Networking revenue was $42 million, up 2% sequentially due to end of year shipments to our telecom customers. Fourth quarter gross margin was 35.7%, down 40 basis points sequentially, mainly on less favorable revenue mix. Premiums paid for critical materials approached normalized levels exiting the quarter. Based on the timing of costs flowing through inventory, we continue to expect to see the full benefit to gross margin in the next quarter or so. Operating expenses were $95 million, down 2.5% from last quarter and below our plan. Actions we took enabled us to reduce spending while continuing to invest in critical programs. This marks the fourth consecutive quarter that we reduced operating expenses in an inflationary environment. Operating margin for the quarter was 12.3%, down slightly from last quarter on lower revenue. Depreciation for the quarter was $10 million; our adjusted EBITDA was approximately $59 million. Non-GAAP other income was $5.2 million on higher interest income. For Q1, we expect our non-GAAP other income to be approximately $4 million to $5 million. During the fourth quarter, we recognized $18.1 million in restructuring expenses and impairment charges. This charge reflects actions we are taking over the next several quarters to optimize our factories and ongoing adjustments to operating cost structure. We believe these actions form the foundation of aligning our infrastructure to achieve our 40% gross margin target. On a GAAP basis, this quarter, we recorded a tax benefit of $21.7 million, largely due to a gain of $25.6 million. The gain resulted from the release of valuation allowance based on tax strategies we implemented to fully utilize previously trapped NOLs. This will also result in a net cash benefit over time. On a non-GAAP basis, our tax rate for the quarter was 14.7%. For 2024, we expect our GAAP and non-GAAP tax rate to be approximately 16%. As a result, fourth quarter non-GAAP EPS was $1.24. Turning now to the balance sheet. Total cash increased by $59 million to over $1 billion with net cash of $129 million. In the fourth quarter, we delivered record cash flow from continuing operations of $85 million, mainly due to lower inventory of non-critical parts, partially offset by investments in strategic inventories of long lead time critical components. In total, inventory came down $28 million or 9 days to 116 days, and inventory turn improved to just over 3 times. DSO increased to 63 days from 59 days largely due to timing of revenue and DPO increased today to 49 days. As a result, net working capital decreased sequentially from 136 days to 130 days. During the quarter, we issued $14 million in CapEx and made debt principal payments of $5 million and paid $3.8 million in dividends. Before I move on to guidance, let me briefly review our full year results. In 2023, we delivered revenue of $1.66 billion, down 10% year-over-year. Semiconductor revenue declined 20% on the market cycle, but we outperformed many of our semi subsystem peers due to the diversity of our portfolio. Non-semiconductor revenue in aggregate was flat year-over-year, with record revenues in the industrial medical and telecom and networking markets offsetting market headwinds in data center computing. During the year, we saw improvement in material costs, and we accelerated actions to optimize our manufacturing print and improve efficiency. As a result, despite lower volume, our 2023 non-GAAP gross margin only declined by 90 basis points year-over-year to 36.1%. In addition, we reduced our operating expense base with our year-end exit rate down 6% from Q4 of 2022 in a highly inflationary environment. Overall, 2023 non-GAAP earnings were $4.88 per share, and adjusted EBITDA was $245 million. For the full year, cash flow from continuing operations was a record $213 million. We invested $61 million or $3.7 million of revenue in CapEx. And we expect CapEx to continue to run at approximately 4% of sales as we execute our plan to optimize our footprint and scale the company in preparation for growth in 2025. Turning now to our guidance. While our first quarter outlook reflects further market weakness, we are seeing some early signs suggesting market conditions will improve as the year progresses. In semiconductor, we expect revenues in Q1 to be down high single digits on slower trailing edge demand with revenues improving in the second half driven by investment in leading-edge logic and incremental memory spending. We expect industrial and medical revenues in the first quarter to decline mid-teens sequentially as customers and distributors are very cautious in the near term. However, we expect improved conditions and revenues for opportunities to drive sequential growth later in the year. We expect data center computing revenues to be down mid-20% sequentially, as digestion of large programs reported in the second half of 2023 and ongoing weakness in the enterprise market impact revenues in the first half. However, we expect new wins and investments in AI applications to support some market recovery towards the second half of the year. Lastly, we continue to expect our telecom and networking revenue to normalize to roughly $30 million a quarter within the next quarter or two. As a result of these dynamics, we expect first quarter revenue to be approximately $350 million, plus or minus $15 million. We expect Q1 gross margin to be approximately 35%, mainly due to lower sales partially offset by better mix and actions we are taking to improve our gross margin. We expect operating expenses to be flat to up slightly from Q4 levels with spending on R&D and other critical programs, partially offset by other reductions. As a result, we expect Q1 non-GAAP earnings per share to be $0.70, plus or minus $0.20. Looking forward, we expect second half revenues to be higher than the first half and our Q4 exit rate to return to over $400 million per quarter. Based on actions we are taking to accelerate optimization of our factory footprint, improve manufacturing efficiency, and increase our mix of sole-sourced products, we expect gross margins to exit the year 250 to 300 basis points higher than our Q1 guidance. We believe this puts us on track to achieve our gross margin goal of greater than 40% at revenue levels in the mid-$400 million range per quarter, better than our previous model. Before I open it up for questions, I want to summarize some key takeaways. 2023 provided a solid proof point of our diversification strategy. Despite two of our markets going through cyclical downturns, we reported record revenues in our other two markets in several product lines. Our long-term investments from new products to channel strategy are yielding tangible results, and our focus in the industrial medical market has driven strong design wins and revenue growth in the market. On the financial side, while we are not satisfied with our gross margin results in this challenging environment, we have a clear plan to increase gross margins and to drive earnings growth. In the meantime, we were successful in controlling our costs, delivering record operating cash flow. Finally, our strong balance sheet gives us flexibility to pursue strategic acquisitions while maintaining multiple options to create shareholder value. Looking forward, we expect demand to increase in the second half of this year and further strengthen into 2025. We are improving our operational efficiency and anticipate gross margins to increase on historical revenue levels, positioning us to reach our gross margin goal of over 40% and to deliver higher earnings than our prior peak as markets recover in 2025. With that, we'll take your questions.

Thank you. Our first question will be from Joe Quatrochi with Wells Fargo.

Yes, thank you for taking the questions. Maybe first on the semi side. I'm just wondering if you could help us out and understand. I think last quarter, you were talking about customers planning for a flat 2024, is that still kind of the thought process there? And then just secondly, on the semi business, can you remind us just how to think about the mix exposure between foundry/logic and memory? Are you able to, you think, at least match the market growth rate, just given kind of your mix relative to the market growth expectations this year?

Yes, Joe, this is Steve. Thanks for the questions. Yes, with regards to your first question, our customers still are telling us that they think that 2024 is roughly the same as 2023. The other thing that's telling us is that the second half will be better than the first half. So essentially, what we're looking at in semiconductor is a Q1 low point and a gradual recovery in the course of the year. We are very well positioned for the node transitions that are going to transpire starting in the second half of this year. So we're very confident in our ability to grow that business in the second half of 2024 and into 2025. As far as our exposure to foundry/logic and memory, we don't have precise numbers on that. We feel we're a little bit more exposed to foundry/logic. But I think as we look at the future memory processes, we're also positioned there. So I think over time, we should benefit from both the transitions in memory as well as the ones in foundry/logic.

Thanks for that. And then just on the industrial medical side, can you help us understand the change in demand? Or what is incrementally weaker than last quarter? I think last quarter, you highlighted a couple of different sub-markets, but maybe just some help in terms of where you're seeing the incremental weakness from just because it's such a diverse business or market for you.

Yes. The industrial medical market is an interesting one for us. We put a lot of resources there and a lot of emphasis there over the past two years. What happened was in 2023, we set all kinds of records. We set a record revenue performance in industrial and medical. We also saw that our design win funnel increased by just under 50%. So we're very well positioned going into this year. I think when I take a look at that market, you're right, it's thousands of customers, hundreds of sub applications. In the industrial medical market, it was actually the last market where supply caught up with demand, and that happened largely in the second half of last year for Advanced Energy and is still going on at some of our competitors. So what our customers are dealing with is some inventory rebalancing and they're also dealing with compressed lead times. Lead time is not too long ago in this business were 26 to 50 weeks and now they're about 8 to 12 weeks. So that creates a bit of an air pocket. What we think is that air pocket will last in the first six months of 2024 as the customers or their inventory rebalancing and adjusted to new lead times. But we think it returns to normal in the second half of this year. And that’s what we have in our plan.

Thank you.

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

Hey hi, thanks for taking my question. Two of them first one, Steve, on the last point you made in terms of your customers on the semi side doing inventory rebalancing, shorter lead time. Do you think that your customers' revenue have to recover first before you see your semi revenues recover? Or do you think it could be in tandem? Or do you think you could lead the recovery?

Yes, Kris, just to clarify, my comments on the inventory rebalancing in the short lead times, those apply to the industrial medical market. So I was answering Joe’s second set of questions essentially.

Alright. What do you think of it on the semi side?

On the semi side, I think all of our customers are saying pretty much the same thing, right, where they've seen some drop in trailing edge demand still relatively strong in China, but starting to taper a little bit outside of China. And from a memory standpoint, there's an expectation that they'll see some recovery in DRAM around midyear and NAND towards the end of this year. In leading-edge logic, I think there's a lot of excitement right now about some node transitions that are on the way. So I think with a little pickup in smartphone demand, continued demand in AI and other computing areas, I think that lead edge should pick up as well in the second half.

Got it. Got it. And then a follow-up for Paul. Paul, I think you mentioned the March quarter gross margin should be about 35%. I'm just curious, hypothetically speaking, if your June revenue volume and product mix is similar to March at $350 million and now that you have the benefit of the premium pricing going away and some of the factory closures, how much would gross margins be in June quarter is the revenue and product mix was similar to March?

I believe that if we keep everything consistent, we should see a slight improvement from the March quarter to the June quarter. However, as we progress further into the year, improvements will result from ongoing factory transitions and other initiatives we are pursuing. The key takeaway is that we expect revenues to rise back up to around $400 million, roughly flat with Q4 levels. We're confident that by the end of the year, this should lead to gross margins that are 250 to 300 basis points higher than what we reported in Q1. This will be driven by the completion of material rollouts, factory enhancements, and efficiencies associated with volume recovery, which will return us to our previous operating levels, though still below peak performance. As revenues normalize, we anticipate meaningful improvement in gross margins. Looking ahead to next year, due to actions we've already taken with factory closures and ongoing efficiency efforts, we believe gross margins could reach about 40% with revenues in the mid-$400 million range. This projection exceeds our prior expectations, where we anticipated needing to reach the mid-to-high $400 million range. Thus, we see significant potential for improvement in gross margins. Currently, the main factor affecting us is revenue levels. Despite recent challenges, measures we've implemented are helping to maintain gross margins at 35%, which is only a 70 basis point decrease given the drop in volume. We believe this sets the stage for a notable acceleration in gross margins as revenues begin to recover.

Got it. Thanks a lot, Paul, thanks Steve.

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

Thanks, Steve. Most industrial companies we cover are expressing a similar sentiment about a weak first half and a return to normal in the second half. Could you elaborate on the source of that confidence? Do you anticipate that industrial medical will experience positive growth in 2024?

Yes. So basically, Steve, I think industrial medical is obviously going to be inherently more difficult given the number of customers we're dealing with in a number of different submarkets. And so we look to a couple of things. One key indicator for us is distribution. So we sell about 45% of our industrial medical products through distributors. If we take a look at the data, a few things stand out. One is the re-sales. So re-sales at our top 5 distributors around the world have grown every quarter since Q2 of 2022. We basically exited 2023 at a very high resale rate. It also shows that we have gained market share in the power subsystem share at all of our major distributors over the past year. At our top three distributors, Advanced Energy is now number one in the category of power subsystems. So I think those are all positive indicators that show we have some momentum in this market and that our design wins are having some impact on our revenue already. Another key factor is the industrial medical market: we were still chasing parts through the first half of last year, so there's still a fair amount we closed out those delinquencies in the second half of last year. What's happening is the customers have different levels of inventory because there are a lot of different parts in the systems that they build. They're working through the inventory and doing the inventory rebalancing. The other significant change our customers are dealing with is lead times. Again, the lead times have contracted significantly, and that creates a bit of an air pocket. So that's why I made the statement that we believe in the second half we're back to normal from a demand standpoint.

And as you think through all that, do you think that industrial medical can show positive growth for the year versus 2023?

Steve, we're not sure. We haven't gone through that model yet, but I hope so.

And one quick one for Paul. Decremental margin in the back half averaged high 30% range. Is that how we should be thinking about Q1 and Q2 if revenue is down? Or can you do better than that?

I think when you look at going from Q4 to Q1, we feel pretty good about holding margins at the 35% range. We think that's going to be a floor. If revenue does tick down again, which we don't anticipate, then I think that's probably a reasonable range for decremental margins, maybe a little bit less because we'll still have some improvement on the material costs, and we continue to reduce our manufacturing footprint as we go. I think the important thing, though, as margins start to recover or revenue starts to recover, is that the incremental margins on the upside ought to be well north of 40%. In some quarters could be well over 50% as we get the benefit of these various factors coming together. We believe we've been able to reduce the revenue point at which we can get to 40% gross margin to this mid-$400 million range per quarter. If we're able to do that, our peak earnings will be substantially higher than our prior peak. That’s not even getting back to peak revenue levels. We've done a lot of good work. I think we've got the foundation in place for gross margin improvement. The environment in the last 1.5 years has been challenging with parts, and that's abated, but we are now in a bit of a market subpoint. Overall, the underlying setup for gross margin, we feel is very good as we go forward.

I appreciate that insight. To clarify, you mentioned that you might finish the year with a $400 million run rate. So, what you are referring to would suggest that you are likely to begin running incrementally at that point, correct?

Yes. I think over the course of the year, we'd see some pickup in volume, and that would lead to some incremental. But you're right. Our projections at this point were that we would expect revenues to recover back to the $400 million level exiting this year. At that level, we ought to be able to deliver gross margins 250 to 300 basis points higher than Q1. That would put you in the 37.5% to 38% range on roughly $400 million. Just to calibrate that with Q4, that would be a 200-plus basis point improvement off of the Q4 levels at the same revenue level. We believe there's fundamental ability to improve gross margins and lower the revenue levels that it takes to deliver those gross margins.

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

Yes, thanks for taking my questions. A couple of follow-ups from my end for Steve and Paul, just going back to your commentary that this year is looking to be more weighted towards the second half. That's well understood the beauty of low-spot numbers. But how should I think about second half of this year 2024 compared to second half of 2023? And I have a couple of other follow-ups.

Yes. I think what we said is we're seeing early signs of improvement or that suggests there will be improvement across most of our markets. So we do anticipate things picking up as we go through the year. Our best view is that we believe we can get back to revenues at $400 million or higher exiting the year, which would be Q4. I think that's the best visibility that we have at this point.

Sure. I guess we got the March quarter guide, we got a feel for June flat to up. We got the December at 400 plus. We just need some more color on the September quarter is what I was trying to figure out.

Well, there's not that many numbers in between there, Mehdi. So I don't think we have perfect visibility to what the pattern will be during the year. Look, semi continues to bounce around the bottom. This is a bit lower than Q1 than Q4, but we think that's going to improve. I think there are early signs of data center improving that can be lumpy. That could come sooner and it could come in a bump, right? I think industrial and medical will be more paced, as Steve said earlier. Telecom is going to sort of glide path down a little bit. It's hard to say exactly how the quarters will play out. In the near term, we have pretty good visibility. As we look out towards the end of the year, we see enough factors that give us confidence to get back to the $400 million or higher, but it's a little hard to project each quarter.

That's fair. And I appreciate all the details. One follow-up here, it would be very helpful if you could give us some thoughts around ASP. Obviously, two years ago, the industry was faced with sufficient supply, and there was a significant price increase for all semiconductor components. I believe some of that price increase was passed on to the end customer. As we go through this inventory correction and the weaker end market demand, how are you positioning the company for a pricing leverage, especially in this core semi cap could your customers wait to last minute to get any kind of concession? And I'm just wondering how we should think about it.

Yes. Let me retrace our steps over the past couple of years during the supply chain crisis. Many of our customers chose to pay premiums. So it wasn't a price increase per se, but we would go out on the third-party market to find these scarce chips and then they would pay the premium that we had to pay for those particular ICs or MOSFETs. As Paul explained during his presentation, most of those premiums have gone away. We had some other customers who preferred price increases. In those cases, we're working with them. The first step is to get the price decreases from our IC suppliers and MOSFET suppliers. Quite frankly, that's been a bit of a challenge. We're working hard to move our IC and MOSFET costs down, but they went up a lot faster than they're coming down.

Okay, thank you Steven. A quick follow-up for Paul. OpEx in 2024, should we assume that it's kind of flattish from here on?

I think sort of flattish, or certainly, that's what we guided to for Q1. I think Q2 will be similar, and flat means it could bounce around a little bit, plus or minus, because we get into the second half, we'll see how revenues recover. There could be a little bit of increase in the second half, more based on inflation and other factors. But in any event, we don't anticipate operating expenses going up. We have a good cost structure. We've worked hard to get it down from where we exited a year ago. We want to try to stay within that cost structure. We're funding our priorities, making great progress on our NPI and other strategic initiatives. We're going to try to stay in roughly within this envelope, but I'd say maybe a little bit of increase in the second half just based on normal factors.

And Mehdi, let me just quickly answer on the pricing issue. Can I just add a little more color because I think your question was more about what leverage we might have moving forward on the price. It's really about new products. In semi, in industrial medical, even data center. We're bringing products to market now. They're not for more value to the customers and offer more profits to us. That's how we plan to move our profitability together with the actions we're taking in manufacturing.

Got it. Thank you, Steve.

Thank you.

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

Hey good evening, thanks for taking my question. I wanted to maybe talk a little bit more about the gross margin. Are you guys saying that the premiums had no effect on the fourth quarter gross margin?

Yes. No. What I said is that it did have some effect. We think that's sort of in the 50 to 100 basis points. So that's continued to come down every quarter. As we said, at the end of the quarter, it was approaching normal levels. Our very end of the quarter exit rate was pretty small, but that means that those costs largely just need to roll through inventory now. Expect that same whatever 75 basis point improvement to flow through over the next quarter or so. That's part of how we protect staying at 35 as part of it in that baseline as we go forward. Those premiums are largely washed out. But there will be a little bit more in the first few months. There are improvements that we're making in the factories and efficiency from a cost perspective, and even a little bit of mix we're getting some product benefit from a sole source perspective, sole source mix towards the end of the year. All of those things really start to fall through. On similar revenue levels in the fourth quarter to what we had this year in the fourth quarter, we ought to be doing roughly 200 basis points better or, as I said, 250 to 300 basis points better than where we're starting the year.

Okay. Okay. So is there a case here, Paul, where I think you just answered it, but I'm not sure on the math. Are you saying that in the second half of the year, as we roll through sales and the gross margin should start to naturally move up because the sales are no longer burdened by the premiums of the gross income dollars goes up in the gross margin dollar gross margin percent goes up with it? Is that the right way to look at it?

Yes. Said another way, the headwind that we've had over the last year, which has been dying down, but a headwind nonetheless, that dissipates completely after, say, the first quarter or a little bit into the second. That means that going forward, we don't have that headwind. As volume picks up and other things improve, we get that all the way to the bottom line. I think the other thing is the improvements that we're making in the factories and efficiency from a cost perspective and even a little bit of mix are factors along with the sole-source product benefit we are receiving. All that leads to increased gross margins. That’s why on similar revenue levels in the fourth quarter to what we had this year, we ought to be doing roughly 200 basis points better or 250 to 300 basis points better counting all of that.

Thank you, Steve. Can you explain why it seems like there’s been another shift in the semiconductor market? The latest numbers for wafer fabrication equipment started at a decline of around 20% a year ago and have improved to declines of about 10% to 15%. Given the challenging market conditions, which appear to be improving, why is your situation moving in the opposite direction?

Yes, Scott, I think if you take a look at the data, we sell into etch and deposition applications, ion implant applications. We do not sell into litho. If you extract the litho WFE, then I think you'll find that we're actually gaining share in that particular part of the market. The share gains are going to happen with the next-generation processes. That's why I spend so much time talking about eVerest and eVoS because those are two new flagship technologies, which have been eagerly embraced by the customers and we think they are going to drive significant share gain for the company over the next three to five years.

Okay. Last question, promise. The debt offering that you did last fall kind of sitting and waiting for an acquisition to deploy that on. Could you just give us an idea how the funnel is looking? Is this sort of a modest setback in earnings here? Does that slow that process down? Or is that still full speed ahead and you're getting closer and closer to something? Just maybe sketch out kind of where you're at.

Yes. Just let me give you some context. This is a modest speed bump for us and it doesn't really impact any of our activities. We're going full speed ahead on development. We're going full speed ahead on M&A. Our M&A approach hasn't changed. We're basically looking at two tracks. The first track is technology tuck-ins, primarily for semiconductor applications. The other track is larger acquisitions. We are in contact with our targets, and we certainly have the money to deploy when we reach agreements with one or more of these targets. But we're in no hurry. We want to make sure that the deals we engage in make strategic sense and financial sense for the company. Then we'll basically deploy the same playbook we used with SL Power; we'll integrate quickly and maximize our synergies as fast as we can.

I'll just remind you, Scott, also that when we did the debt offering, one of the beauties of that was that it gives us optionality as well. We don't have to be in a hurry. We can be patient. There are other things we can do to deploy that cash that add value to the company, including potentially addressing our debt next fall if that's something that makes sense at the time. We have a lot of options, and that I think gives us the flexibility to be smart, to be patient, and to make sure we're doing the right thing.

Okay, thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and will also conclude today's conference. You may now disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.