Advanced Energy Industries Inc Q4 FY2024 Earnings Call

Greetings, and welcome to the Advanced Energy Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's fourth quarter and full year 2024 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 today's earnings press release and presentation on our website at ir.advancedenergy.com. Before we begin, 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 estimates as of today, February 12, 2025, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as content. 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 relocation costs, restructuring and asset impairment charges, and unrealized foreign exchange gains or losses. Please refer to a detailed reconciliation between GAAP and non-GAAP results in our press release today. With that, let me pass the call to our President and CEO, Steve Kelley.

Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. Today, Paul and I will discuss our fourth quarter performance highlights from 2024, our first quarter outlook, and our 2025 priorities. We delivered strong financial results in the fourth quarter. Revenue of $415 million exceeded the high end of our guidance range and returned the company to year-over-year growth. Pockets of higher demand in semiconductors, as well as strength in data center computing, drove the outperformance. Fourth quarter gross margin was 38%, our best performance in three years. We benefited from higher volume as well as improved factory efficiency. Fourth quarter earnings of $1.30 per share were above our guidance and grew year-on-year. Before providing more details on the fourth quarter, I'd like to review our 2024 performance. From a financial standpoint, we hit a low point in the first quarter of 2024 due largely to soft market conditions. From that point forward, our revenue improved every quarter. Data center computing rebounded strongly in the second quarter as our design wins ramped to volume, spurred by demand for AI compute capability. Data center demand continued to increase in the second half and remains very strong. Semiconductor revenue also grew over the course of the year as we capitalized on a variety of upside opportunities. The industrial, medical, telecom, and networking markets were headwinds to revenue in 2024. The industrial and medical market underperformed due to lackluster demand as well as elevated inventory levels at both distributors and end customers. As expected, telecom and networking revenue reverted to more normal levels after a very strong 2023. In 2024, we made major strides on the new product and design win fronts. We launched 35 new platform products in 2024. In addition, we developed many custom and modified standard products in close cooperation with our customers. In semiconductor, we continue to experience strong customer pull for our best-in-class EVOS, eVerest, and NavX products. We shipped more than 250 qualification units by the end of last year and are experiencing continued strong demand this year. In 2024, we began to reap the benefits of our move to a modular architecture. The typical development cycle time for new derivative products has been compressed from roughly 18 months to less than four months, which is enabling our customers to deliver solutions faster than ever before. Another benefit is that shorter development cycle times are allowing us to engage in more opportunities. In industrial and medical, our momentum on the design win front continues to build, fueled by a healthy stream of new products and an improved go-to-market strategy. Our new customer-friendly website is generating more opportunities and helping us to convert more of those opportunities into wins. In the data center computing market, we accelerated our technology roadmap in 2024 and will continue to do so in 2025. This acceleration is tied to the increasing rack power requirements of each new generation of AI data centers. We are working more closely with customers to develop technology that meets not just the needs of their next generation of products but also the generation after that. Key factors in our data center success are the ability to move fast as well as deep expertise in the design and manufacturing of highly reliable products with industry-leading power density and efficiency. In operations, we made significant progress on our 15 to 5 factory consolidation plan, a key part of our goal to move gross margin above 40%. On the M&A front, we acquired Airity, which brought critical GaN-based high-voltage power technology and expertise to Advanced Energy. We are delighted with the acquisition and have already integrated Airity technology into some of our flagship products. Now I'll provide more color on the fourth quarter. In semiconductor, fourth quarter revenue increased 15% sequentially, well ahead of plan, as we experienced stronger year-end demand across multiple customers. New product shipments were strong, driven by evaluation and qualification activity for EVOS, eVerest, and NavX products. At SEMICON Korea next week, we will launch another leadership product, a matchless RF delivery system based on the eVerest modular architecture. This new product, called Evolve, offers millisecond tuning, multilevel pulsing, a small footprint, and no moving parts. We shipped Evolve qualification units in December and expect the technology to drive further gains for Advanced Energy in both deposition and etch. In data center computing, fourth quarter revenue grew 10% sequentially, driven by strength in hyperscale. This was a record quarter for data center computing product revenue, and we see continued strong demand moving into 2025. Fourth quarter industrial and medical revenue was sequentially flat as customers and distributors continued to work down inventories. Industrial and medical new product and design win activity was robust. We launched 12 new I&M products, including a number of configurable power supplies. We won new designs in test and measurement, industrial production, electrosurgery, and aerospace and defense. In the fourth quarter, we launched a new program with Sager, one of our largest distributors, to ensure speedy delivery of fully configured prototypes. Now I'd like to touch on our outlook for 2025. We expect first half 2025 demand to be roughly equal to second half 2024 demand. We believe that our full year 2025 semiconductor revenue will grow faster than market, due largely to initial new product ramps in the second half. We expect data center demand to remain robust in 2025, based on projected AI investments as well as customer adoption of our high-value solutions. In the industrial and medical market, we believe that we are close to a bottom and expect to begin growing again as early as the second quarter of this year. I'd like to close by touching on our 2025 priorities. First, we will maintain our strong new product and design win momentum. We continue to invest heavily in R&D and go-to-market initiatives and expect those investments to drive increased share as market conditions improve. Second, we will largely complete our factory consolidation plan, which will give us a much better foundation to move gross margin above 40%. Finally, we plan to use our strong balance sheet to pursue strategic acquisitions which will accelerate our growth in industrial and medical and broaden our technology portfolio. At our recent Analyst Day event, we outlined a 2030 target model which calls for doubling our revenue, increasing earnings by four times, and expanding gross margin to 43%. With a diverse of attractive end markets, strong customer relationships, best-in-class technology, and a highly capable factory network, we have high confidence in our ability to achieve those long-term goals. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. In the fourth quarter, we executed well to deliver both revenue and earnings above our guidance. Upside in the semiconductor and data center computing markets more than offset ongoing sluggishness in industrial and medical. We continue to execute our manufacturing cost improvement initiatives and delivered gross margin at 38%, the third consecutive quarter of sequential increase. Lastly, cash flow from operations was $83 million, just below last year's record Q4. Overall, despite a challenging start to 2024 and an ongoing inventory correction in the industrial and medical market, we finished the year on a strong note, delivering Q4 year-over-year growth in revenue, gross margin, and earnings. Now let's review our financial results in more detail. Fourth quarter total revenue of $450 million increased 11% sequentially and 3% year-over-year. Semiconductor revenue was $227 million, up 15% from Q3 and 19% from last year with growth across products and service. We were pleased with our ability to respond quickly and capture additional year-end upside. Industrial and medical revenue of $77 million was about flat quarter-over-quarter and down year-over-year. Channel inventories continue to be above target levels as market conditions remain soft. Data center computing revenue was $89 million, up 10% sequentially and 41% year-over-year. Demand strengthened again as we started production ramps of new high-power products. Excluding the revenue from premium recoveries during the supply chain crisis, data center product revenue reached a new record. Telecom and networking revenue was $23 million, down year-over-year but up 20% sequentially as we ramped production of a new program that was pushed out from Q3. Fourth quarter gross margin was 38%, up 170 basis points sequentially due to higher volume, favorable product mix, and improved manufacturing efficiency. Gross margins in Q4 2024 were roughly 200 basis points higher than 2023 levels at a similar revenue run rate as we are seeing the initial benefits of our gross margin improvement initiatives and improved mix take effect. Operating expenses were $102 million, up 5% from last quarter, driven largely by higher sales and incentive-related expenses and timing of a few items that we do not expect to repeat in Q1. Operating margin for the quarter was 13.5%, up 300 basis points from last quarter and 120 basis points from last year, demonstrating the margin leverage of our model. Depreciation for the quarter was $11 million, and our adjusted EBITDA was $67 million. Other income was $1.5 million, down as expected from Q3 on lower cash balances and interest earnings following the prepayment of our $345 million term loan in late Q3. Our non-GAAP tax rate for the quarter was 14.3% on favorable year-end discrete items. As a result, fourth quarter earnings were $1.30 per share, up from $0.98 per share in the previous quarter and $1.24 a year ago. Turning now to the balance sheet. Total cash increased by $65 million to $722 million, with net cash of $157 million. In the fourth quarter, we delivered close to record cash flow from continuing operations of $83 million. Inventory days came down to 126 in Q4 from 143 in Q3, and inventory turns improved to 2.9 times. DSO decreased to 57 days from 62 days largely due to timing of revenue, and DPO remained flat at 50 days. As a result, net working capital decreased sequentially from 155 to 133 days. During the quarter, we invested $13 million in CapEx and paid $4 million in dividends. Before I move on to guidance, let me briefly review our full year results. In 2024, we delivered revenue of $1.48 billion, down 10% year-over-year in a challenging market environment. The decline was driven by lower revenue in both the industrial medical and telecom networking markets, which were down 33% and 53%, respectively. These results came after record years in 2023, followed by unprecedented industry-wide inventory corrections in 2024. On the other hand, semiconductor revenue grew 7% from the trough in 2023 and achieved its highest level in two years in the fourth quarter. In addition, data center revenues grew 14% and reached record product revenue levels exiting the year. During 2024, we focused on positioning ourselves for faster earnings growth as markets recover. We reduced both fixed and variable costs and accelerated actions to optimize our manufacturing footprint. As a result, despite lower revenues in 2024, our non-GAAP gross margin was up 20 basis points year-over-year, and we exited the year at the highest gross margin since Q2 of 2021. Our increased investment in R&D delivered a significant wave of new platforms which have the potential to drive significant growth in revenue and market share over the next several years. This investment was more than offset by lower SG&A as we drove actions to improve efficiency and scale. As a result, full year 2024 non-GAAP earnings were $3.71 per share, and our adjusted EBITDA was $193 million. 2024 CapEx was $57 million or 3.8% of revenue. We expect 2025 CapEx to run at or above these levels as we invest in ramping several new platforms and execute our plan to scale the company to support long-term growth. However, longer term, CapEx should normalize back to historical levels as we complete these investments. Turning now to our guidance. We expect Q1 revenue to be approximately $392 million, plus or minus $20 million. The sequential change is mostly driven by the outperformance in semiconductor and data center in Q4, as well as seasonal factors that we discussed on our last call. While lower than Q4, our Q1 guidance is substantially above last year and higher than previous expectations. We expect Q1 gross margin to be approximately 37% to 37.5%, down slightly quarter-over-quarter on lower volume. We are pleased with our improvement in gross margin over the past several quarters and expect to see additional improvements in the second half as we complete the product transfer process and close our China factory by midyear. We expect operating expenses to come down to $98 million to $100 million on sequentially lower sales-related costs and timing of expenses from year-end, partially offset by ongoing investments in R&D and other critical programs. We expect Q1 other income to remain in the $1 million to $2 million range. As a reminder, our tax rate is expected to increase to around the 19% range beginning in Q1 due to the Pillar 2 global minimum tax regime. As a result, we expect Q1 non-GAAP earnings to be $1.03 per share, plus or minus $0.25. Let me provide some concluding comments. Looking back at 2024, we are encouraged by the progress we made in executing our strategy, including delivering a record number of new products, capturing new design wins across our markets, improving gross margins, and growing our cash position. Looking forward to 2025, we're excited about the opportunities ahead. While the market environment continues to be mixed with limited visibility to the second half, we believe ongoing progress on our strategic initiatives will define our future and position us for outsized growth in revenue and earnings over time. We're driving adoption of our next-generation semiconductor platforms to grow share, leveraging design wins and channel investment to capitalize as the industrial and medical market recovers, and maximizing high-end opportunities in AI-driven high-powered data center applications. Executing our factory consolidation plan will allow us to further lower manufacturing costs, enable scale, and achieve our gross margin goals. Finally, our strong balance sheet and cash flow give us ample capacity to make strategic acquisitions to add scope and expand our market position. With that, operator, we'll take your questions.

Thank you. We will now be conducting a question-and-answer session. And the first question comes from the line of Brian Chin with Stifel. Please proceed with your question.

Hi, there. Good afternoon and thanks. Congratulations and thanks for letting us ask a few questions. Maybe first question, just thinking about sort of the first half versus second half last year commentary. I think that might put semi-equipment maybe in the vicinity of sort of 10% year-over-year growth. And I know you talked about the potential to outgrow WFE from earlier in the prepared remarks. And so is that 10% year-over-year, even with an acceleration in the back half, as you suggested? Is that maybe the right frame of reference in terms of the outperformance?

Yeah, Brian, this is Steve. What we said basically is we were able to take advantage of opportunities in Q4 to really maximize the revenue in semiconductors. So there were two real highlights in Q4. One was their semiconductor revenue, and the second was the data center revenue. As we move into Q1, we're seeing the semiconductor demand moderate a bit. And again, that's after record Q4. As we move forward in the year of 2025, we haven't given a specific guidance. But we think the second half is better than the first half, largely because many of our new products are beginning to ramp volume in the second half. And that's what's driving our confidence in our ability to outperform the market in 2025.

Okay. Maybe just to drill down at one level, clearly, some of your new design wins for EVOS and our next-gen supplies and matches should layer in over time side to future technology transitions and equipment platforms. But can you just clarify or confirm whether some of your early designs are closely aligned with the NAND market? Were there clearly some pickup in upgrade activity that's very etch and deposition focused? How do you see that contributing maybe to your equipment outlook this year?

Yeah, it's interesting because what we're finding is we shipped over 250 of these evaluation units between eVerest, EVOS, and NavX. And that was through December of last year. Obviously, the demand continues into this year. But they're finding homes across all leading-edge processes. And the issue is customers using the older technology just can't get the job done. They're losing throughput and they're losing yield based on old technologies. So that's forcing them to move to our new technologies. And that's the same challenge whether you're talking about NAND, DRAM, or leading logic. So we're seeing equal interest from all segments and those technologies.

Got it. That's helpful. Maybe I could just ask one more question. It's actually kind of financial related. There's clearly been a lot of talk and reporting about broader weakness in industrial. This isn't so much on your revenue side, but actually in terms of gross margins. I think semi-cap companies tend to be classified as industrial markets for chip companies. And so do you actually feel pretty good about the cost point and availability of chips you buy and integrate into your power subsystems? Are there opportunities to actually lock in favorable pricing and supply that supports your gross margin expansion targets?

That's a great question. It's an issue we deal with every day practically. And I would say it's hard to give a general answer. I think looking back over the last three or four years, we've divided our suppliers into two camps: those who supported us well during the shortages and those who didn't support us very well at all. I think we've basically focused more business with suppliers who have shown the degree of support we're going to need over time. Now when it comes to pricing, I think there are market forces at work. And certainly, speaking generally, we see prices coming down, but the willingness to engage in price discussions varies from supplier to supplier. But obviously, it's a positive for us if the supplier is willing to move on price to keep us more competitive.

Yeah, Brian, I'd just add on to that. I think at this point, it's a little too early as we think about our gross margins plans to count on material improvements. As Steve said, there's a lot of discussions and, as you know, material costs are up, excluding premiums, they're up from where they've been historically. So this is an area we're working on and could potentially be a tailwind to gross margins over the year, but I think it's a little early to bake that in.

Okay, thanks, Paul.

Yeah, hi. Thanks for taking my question. Steve, first on the traction you're seeing on EVOS and eVerest. I'm curious, like you said is across all markets, specifically on the edge side, where are you seeing more traction? Is it on the conductor edge or is it more on the dielectric edge, you're seeing more traction? And then I have a follow-up.

We're noticing progress in both areas due to similar challenges. The primary issue we're facing, whether with conductor or dielectric, is the capability to drill deep holes while minimizing damage to the wafer. This impacts throughput and yield. The technologies we offer help our customers enhance their etch rates and reduce defect rates as they adopt these advanced processes. Overall, there has been significant interest in both conductor etch and dielectric etch applications.

I mean, is one better than the other? Or are they kind of similar between conductor and dielectric?

No, I think the difference really is power levels. So in the conductor branch, it doesn't require the same power level we see in dielectric. But at the same basic technique that we bring to our customers.

Got you. And then a quick follow-up. You mentioned strength in the second half in semi. I'm curious what gives you that confidence. Is it primarily due to design win traction pipeline or is there something else happening?

Yeah, Krish, it's really design wins. We've had so much activity across our customer base over the last year and a half that we think some of this is going to start bubbling up into revenue in the second half this year. So that's what gives us the confidence. I think the only statement we've made is we think we can grow faster than market. We don't know exactly what the market is going to be in the second half. But what gives us that confidence is our new products plus the fact that the etch and depth intensity for these leading-edge processes continues to increase.

Hey, good afternoon. Congratulations on a terrific quarter. I just wanted to understand your thinking around the share gains. You've spelled out the big products I'm just curious if you're thinking kind of like more second-half oriented, which I think the entire market is on semi, would the share gains be more pronounced in the second half than the first as a result?

Yeah. I think you're referring to semiconductor, in particular, right, on the share gains?

Yeah. I thought I said that I didn't, yes.

Okay. So I think when it comes to market share in semiconductor that takes time, right? Because there's a lot of puts and takes as you go through a year. And I think we commented on initial ramps of our new product in the second half. And that's really what gives us confidence that we can grow second half from first half in semiconductor. I think what you'll see is our market share will increase over the coming three to five years across the board in plasma processes for semiconductor based on the strength of these EVOS and eVerest technologies. But it's going to take some time to materialize. That's just the nature of market share in semiconductor.

Yeah, it's kind of a tough question to answer because we don't have perfect visibility. But I think one way to think about it is if you look at the industrial and medical market historically, you don't see the magnitude of change we've seen this year. And it might be more in the 5% to 10% range depending on the economic conditions or what's happening. We've seen much bigger gyrations than that. And if you listen to us and many of our peers and customers, you could say it's down 30% to 50%, depending on who you are. We're probably on the better side of that. I think you can attribute that delta largely to the inventory situation, which was caused by the supply chain shortage, which extended lead times and caused people to buy inventory based on those lead times. Now that those lead times have collapsed, they're working through that inventory. So it's hard to handicap, but I think you can look at some historical levels to get some perspective on it.

We believe we’re nearing the end of our corrections as this marks our sixth quarter of adjustments in the industrial and medical sectors. Over the past year and a half, we have significantly increased our efforts in this area to enhance our design win funnel and position ourselves for market share growth as the industrial and medical markets recover. We anticipate this recovery starting this year, and by 2026, we expect to achieve a higher market share in industrial and medical than we did last year.

Hey, guys. Good afternoon. Can you hear me?

Hey, Rob.

I don’t think this has been mentioned yet. Could you discuss your manufacturing footprint in relation to potential tariffs and Mexico? I know you're moving away from China, but it seems that many products in Mexico might not go directly to the U.S.; they could end up elsewhere or stay in Mexico. Given that, are your customers feeling the need to adjust their shipping locations or production processes? Is that something you're discussing?

Sure. I want to share a few general thoughts on that before handing it over to Paul for further comments. We generally focus on two areas: our manufacturing footprint and our supply chain. Regarding our manufacturing footprint, we began transitioning away from China several years ago and expect to completely exit manufacturing in China by June of this year. That's our plan. The second aspect involves Mexicali, which accounts for less than 10% of our revenue, and you're correct that most shipments go to locations outside the U.S. However, we still send some shipments to the U.S. Therefore, we are exploring ways to offset potential tariffs. If we cannot address those, we can produce these products in other factories located in Southeast Asia. It's a straightforward solution. On the supply chain side, we have been working for several years to decrease our reliance on Chinese suppliers, primarily because some of our customers have requested this. Currently, we have very few inputs from China into the U.S., which are mainly related to engineering builds and spare parts for our service centers.

Yeah, the thing I'd add to that is it's a pretty fluid situation. So as Steve said, I think we have mitigating strategies relative to supply chain and logistics and quite probably pricing. So we'll monitor the situation. Obviously, we're learning more about it. To be clear, there's nothing embedded in our guidance related to tariffs at this point given that it's a pretty new and full issue. But again, I think on balance, it should be a large impact, and there's a variety of strategies to mitigate that impact for us.

Thank you for the question. Regarding the semiconductor sector, I am looking to understand your expectations for 2025. Your baseline scenario suggests that wafer fabs are expected to remain relatively stable, and you anticipate exceeding that growth due to new product launches in the latter half of the year. Are you noticing any customers increasing their inventory levels after reducing their buffer stock over the past few quarters? Also, could you provide a reminder about the new products being launched and whether there will be any changes in average selling prices compared to the previous generation products?

Yeah. This is Steve. I'll make a few comments, and Paul will chime in. Hard to make comments about what our customers are doing. They don't always tell exactly where the products are going. We don't know. But all we know is that demand was good. We saw growth last year, and Q4 was our best quarter since Q4 of '22. So we're pretty happy with that. We think we're at a point now where the purchase of our customers are pretty close to what they need near term. So I don't think we're dealing with that many inventory issues. What was your second question, I'm sorry?

Yeah. Just trying to understand, as you think about the growth drivers ASP dynamic for EVOS, eVerest, et cetera? Just is that a higher ASP than the prior generation product you think about embedding that in your line of sight to revenue growth?

Yes. In general, the new products bring more value to the customer than we're capable and they have a higher price tag.

Our networking business, referred to as the Telecom and Networking segment, has seen a more concentrated focus in recent years, leading to the elimination of parts of the business that did not meet our margin expectations. Currently, this segment is relatively stable with little anticipated growth moving forward. Most of our growth will come from the semiconductor, data center, industrial, and medical sectors. While the Telecom Networking segment is performing adequately, it is not expected to contribute to growth.

And ladies and gentlemen, that does conclude the question-and-answer session. That also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.