Advanced Energy Industries Inc (AEIS) Q3 2026 Earnings Call Transcript

Good afternoon, everyone. Welcome to the Advanced Energy Third Quarter 2026 Earnings Conference Call. With me today are Steve Kelly, our President and CEO, and Paul Odom, our Executive Vice President and CFO. You can find today's earnings press release and presentation on our website at ir.advanceenergy.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 SDC filings. All forward-looking statements are based on management estimates as of today, November 2, 2026, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP basis unless otherwise specified. Detailed reconciliation between out-gap and non-gap results can be found in today's press release. With that, let me pass the call to our president and CEO, Steve Kelly.

Thanks, everyone. Good afternoon, everyone, and thanks for joining the call. We delivered a record third quarter with revenue and earnings above the high end of guidance. Strong factory execution enabled us to meet increased customer demand. Total revenue grew over $120 million sequentially. Revenue in each of our target markets grew sequentially and year over year. Earnings per share more than doubled from a year ago, largely due to higher volume and operational leverage. Over the past year, we invested in capacity expansion and strategic piece part inventory. These investments are enabling higher revenue, increased profitability, and greater customer satisfaction. In 2026, our execution and supply chain resilience have become competitive advantages. Our new flagship factory in Thailand is beginning to generate revenue. Multiple data center customers have already qualified the factory, and semiconductor customers are expected to follow shortly. Our Thailand production lines are being brought up by subject matter experts from around the world. After recently visiting the factory, I have no doubt that Thailand can become the largest and most efficient factory in our network, a true flagship. In addition, we continue to increase output at our factories in the Philippines, Malaysia, and Mexico. We are expanding our footprint and becoming more efficient in all three locations. The result is that we are on track to expand our total revenue-generating capacity to over $5 billion by the end of 2028. Demand is strong across all of our target markets. We are benefiting from significant market tailwinds across semiconductor, data center, and I&M. In addition, we believe that our new products will drive market share gains. In Semiconductor and Data Center, customers are projecting that demand will continue to strengthen through 2027 into 2028. In Industrial and Medical, we experienced our fourth consecutive quarter of year-over-year growth, a trend we expect to continue into 2027. Now let me provide some color on each of our markets. In Semiconductor, we delivered another record quarter, with year-on-year growth of over 60%. Increased investment in leading-edge wafer capacity is driving record demand for AE products. Our operational performance in this market has been solid, and we have been recognized by major customers For our ability to keep pace with increasing demand. During the quarter, we won several plasma power designs for advanced node processes, the culmination of multi-year design efforts. We believe that these wins will accelerate our growth as leading-edge processes begin to ramp their production in 2027. We secured two additional wins in Semiconductor Test, the latest in a series of test-related wins. The power required to test AI chips and modules has increased meaningfully, driving the need for high power density, high efficiency, custom solutions from Advanced Energy. We expect our new Plasma Power and System Power products to drive market share gains over the next several years. And data center computing. Revenue grew almost 50% year-on-year. Increased demand and factory execution drove the outperformance. Our business with hyperscale customers continues to strengthen with multiple new programs driving revenue growth this year and into 2027 and 28. We also expanded our growing list of second wave customers with several new wins secured in the third quarter. We expect that revenue from second-wave customers will add to hyperscale revenue beginning next year. At the OCP Global Summit last month, we showcased our 800-volt power distribution board. With industry-leading power density, efficiency, and reliability, our modular solutions can be customized rapidly to meet the evolving requirements of 800-volt architectures. We also highlighted our liquid-cooled power technology, which can be applied in both 50-volt and 800-volt systems, providing customers with optionality as they transition to higher-powered racks. Looking to 2027 and beyond, we expect data center revenue will continue to grow substantially, driven by three factors. Growth from next-generation hyperscale programs, revenue from second-wave customers, and the eventual ramp of 800-volt solutions. In industrial medical, revenue grew sequentially and year-over-year. Factory execution continues to improve, allowing us to meet growing demand and work down our overdue backlog. We expect robust market conditions to continue into 2027. In the distribution channel, which accounts for roughly half of I&M revenue, distributor resales continue to outpace our sales into the channel. In the third quarter, we secured multiple design wins in medical imaging, life sciences, test and measurement, and mill arrow applications. In September, we launched our defiant future family of ruggedized power supplies for aerospace and defense applications, which we expect will generate significant revenue for AE in the coming years. To expand our customer reach, we continue to invest in digital marketing. Today, an increasing number of our I&M design wins originate as web leads, and some of those Those wins have turned into multimillion-dollar opportunities. In telecom and networking, revenue grew sequentially as AI-related applications drove increased customer Now for some closing thoughts. We are executing well to meet increased demand across all of our target markets. As a result, we have increased our 2026 growth outlook to around 40%. Looking ahead, based on customer forecasts and feedback, we believe that strong investments in AI data center and leading-edge wafer capacity will continue through 2027 into 28. We are expanding capacity by ramping up our Thailand factory, as well as increasing output at our other factories. We believe that we have enough capacity to deliver sizable upside over the next several quarters, assuming adequate supply of key components. We will continue to invest heavily in R&D. We believe that these investments will enable us to deliver differentiated products to our customers and gain share across all of our target markets. Leveraging increased product value, improved manufacturing efficiency, and higher volume, we have line of sight to over 43% gross margin. Finally, we remain active in pursuing potential acquisitions which make strategic and financial sense. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. In the third quarter, we delivered record financial results that exceeded the high end of our revenue, gross margin, and EPS guidance ranges. Revenue of $696 million increased more than 50% year-over-year, and earnings of $3.65 per share more than doubled. Gross margin improved 300 basis points year-on-year to 42.1%, contributing to record operating income. Operating margin reached 24.4%, the highest level in recent years. And we generated operating cash flow of $66 million while continuing to invest in strategic inventory to support expected customer ramps. Now let's review our third quarter financial results in more detail. Total revenue of $696 million increased 21%, or $122 million sequentially, well above the high end of our guidance range. Solid execution allowed us to meet increasing customer demand and capture upside to our guidance. Semiconductor revenue was a record $322 million, up 16% quarter-over-quarter and 64% year-over-year. Strong demand for leading-edge equipment, increasing etch and deposition intensity, and expanding system power revenue continued to drive robust growth. Data center computing revenue of $256 million was also a record, up 34% sequentially and 49% year-over-year. Increasing customer demand and the initial ramp of new programs are driving higher revenues. Industrial and medical revenue was $91 million, up 13% from last quarter and 27% from last year, as we increase output to support growing customer demand. And telecom and networking revenue was up 13% sequentially and 15% year-over-year to $28 million, driven by AI-related programs. Gross margin in the third quarter was 42.1%. Excluding the benefit of Q2 tariff refunds, gross margin expanded 140 basis points, driven by higher volume and manufacturing efficiency. Operating expense of $123 million was within our guidance range and increased slightly quarter-over-quarter due to R&D program spending and higher variable costs. With strong top-line growth, gross margin expansion, and OPEX leverage, our operating margin expanded 760 basis points year-on-year to 24.4%. As a result, third-quarter operating income increased 118% year-over-year to reach a record $170 million. Depreciation was $12.2 million, and our adjusted EBITDA was $182 million. Other income was $8 million, up from $5 million in Q2, mainly due to a full quarter of higher interest income and lower interest expense following our convertible note offering in Q2. For Q3, our non-GAAP tax rate was 15.7%, in line with our guidance. Third quarter earnings were $3.65 per share, up meaningfully from $2.74 last quarter and $1.74 a year ago. Turning now to the balance sheet. Following the end of Q3, we redeemed the remaining $136 million of our 2028 convertible senior notes, including unwinding the related note hedge and warrants. Since the settlement occurred on October 2nd, this remaining debt and related cash are included on our Q3 balance As a result, total cash and equivalents were $1.42 billion and net cash was $159 million, both up from Q2. Inventory days decreased one day sequentially to 144 and turns stayed at 2.5 times. We expect inventory turns to remain around these levels over the next few quarters. Days sales outstanding decreased two days to 61 days, and days payable outstanding decreased four days to 81 days. Q3 networking capital was up one day to 124 days. As a result, Q3 cash flow from continuing operations was $66 million. During the third quarter, However, we paid $4.1 million in quarterly dividends and invested $31 million in CapEx to support the production ramp in our factories. For the full year, 2026, we now expect capital investments to be towards the low end of our $180 to $195 million range on timing of expenditures. However, we will continue to invest at an elevated level throughout 2027 as we add capacity towards our target of over $5 billion in annual output. Following the 2028 convertible note redemption, we resumed our opportunistic share repurchase program. And in the month of October, we repurchased approximately $30 million of our common stock at around $241 per share. Turning now to our guidance. Demand continues to strengthen across our markets, with initial production of several new product programs contributing to revenue growth. As a result, we are forecasting fourth-quarter revenue to be approximately $735 million, plus or minus $25 million. We now expect 2026 total revenue to grow around 40%, up from our previous target of low to mid-30%. Driven by increased customer demand, semiconductor revenue is now projected to grow over 60% year-on-year in the second half, up from the prior outlook of 50%. Our outlook implies semiconductor product revenue, excluding service, will grow by around 45% in 2026. Following a strong Q3, we expect fourth-quarter data center computing revenue to increase further. As a result, we are raising our 2026 data center revenue growth to the high 50% range. In industrial and medical, we continue to expect year-on-year revenue growth for the next few quarters. And in telecom and networking, revenue is expected to moderate slightly after the stronger Q3. We expect Q4 gross margin to be in the 42 to 42.5% range. We expect Q4 operating expenses to increase to $126-128 million, due primarily to investments in new products. We expect other income to be approximately $8 million and continue to target a tax rate in the 16% range over the next several quarters. As a result, we expect Q4 non-GAAP earnings per share to be $3.90, plus or minus 30 cents, on 41.2 million shares outstanding. Our Q4 guidance puts us on a run rate to exceed our 2030 target model, three years ahead of our original plan. Let me finish with some concluding comments. We are executing well to meet a strengthening demand environment across our markets. After strong growth in 2025, we are on We are on track to deliver 40% revenue growth and over 90% earnings per share growth in 2026. Current customer forecasts suggest 2027 revenue growth will be robust, and we continue to expect earnings per share to grow faster than revenue. With higher value new products still ramping and plans to further improve manufacturing efficiency, gross margin is on track to reach and eventually surpass our target of over 43%. Our strategies continue to position advanced energy for growth and increase our resilience in all market conditions. These strategies include diversifying into an expanding set of growing markets centered on our core competencies in precision power conversion, investing in leading-edge technologies and platforms, and expanding our customer reach through our digital platform. In addition, we are building out a scalable, best-in-class manufacturing footprint, strengthening our supply chain, investing in inventory to mitigate risk, and fortifying our balance sheet with low-cost capital. As a result, we are well-positioned to gain share and outgrow our markets. With that, we will now take your questions. Operator?

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment, please, while we fall for questions.

Our first question is from Krish Sankar with TD Cowan.

Yeah, hi. Thanks for taking the question, and congrats on the great results. Steve or Paul, my first question is, you know, given your guidance, very impressive. It looks like sequentially SEMI goes probably mid-single digits. Data center probably goes like 10%. I'm just wondering, are those in the ballpark? And given the visibility you have, any thoughts into quantifying SEMI and data center power supply growth in 2027?

Yeah, I think you're in the right ballpark for Q4 sequential numbers. I think that's in the right range and consistent with the overall number we gave. You know, for 2027, we think that growth will continue to be robust. I think last quarter, we said we expected it to be over 20%. Directionally, we think that's probably around 30% at this point. You know, generally, we'd expect that, you know, to have sequential growth as we go through the year. But as you know, it's not linear necessarily based on supply constraints and product transitions. Having said all that, you know, it's a pretty strong demand environment, and demand growth could likely be higher than that number. But we also, you know, there is some uncertainty regarding supply, which makes it difficult to give really actual specific guidance for 2027. But directionally, that's how we're thinking about it.

Gotcha. Thanks, Paul. And just as a follow-up, within the 30% range for next year, how do you think about data center and TEMI and INM?

Well, I think, again, we're not giving any guidance by market at this point, but you can look at relative growth from this year. You can also look at comments made externally about projected WFE growth and data center growth. Obviously, I&M will grow slower than those, and we expect telecom and networking to be about flat. So, you know, we're not breaking it down at this point just because it's, you know, looking forward into the next year. But I think you can get a pretty good idea of how that breakdown could look.

Our next question is from Matthew Prisco with Cantor Fitzgerald.

Hey, thanks for taking the question. On the semi-size, can you maybe offer some color on what type of visibility you're seeing today? And maybe how did the disgust wins impact your ability to grow versus WFE in 27? Thank you.

Yeah, Matt, this is Steve. You know, I think the visibility we have into 27 from our semi-customers is excellent. They've given us detailed forecasts for the entire year. And as we look into 28, we don't have a forecast by part type, but we have directional guidance that it continues to go up from 27. So I think it's quite good. So, you know, for us, we're benefiting from two things. One is obviously the market surge, and most of that is coming from our older products, and we're executing on that, and that's benefiting our top line and our bottom line. But in addition, we're starting to see new products become a significant factor. So as we look into 27, we believe that more than 10% of our city revenue will come from new products. So, those new products basically are the way we're going to gain share over the next five years, and most of those new products are going into advanced logic and memory processes. In addition, we have the new products on the system power side, where we've been designed into a variety of tester, burn-in, and process equipment applications.

Great. Thank you. And then maybe over to the data center. How are you thinking about those second-wave ramps and the magnitude of contribution there in 2027 based on current conversations? Thank you.

Yeah, so on the second-wave ramps, again, let's go back. I'll just define it for folks. These are basically all the customers we have for data center products except for the hyperscalers using Compass Enterprise, Networking, Neoclads, et cetera. And, you know, we believe that over time that, you know, altogether, these second wave customers could generate, you know, more than $300 million in yearly revenue. That's not going to happen next year, but we think by 29, that's the case. So I would say, you know, every quarter goes by, we add to our roster of second wave customers. So we're qualified in the early shipment phase for multiple second wave customers. And some of that's in Thailand, and some of it's in the Philippines. A lot of great opportunities. What I can say as we look into 27 is that we have a relatively small amount of revenue or forecast for the second wave customers because we don't understand at this point which of those customers will ramp the volume and which may be constrained by other factors. So we have some in our forecast, but we're not dependent on second wave revenue to meet our outlook for 27.

Our next question is from Scott Graham from Seaport Research Partners.

Hey, Scott.

Scott, is your line on mute?

I guess I was on mute. I'm sorry about that. Hi. Good evening. So I was just wondering, you know, Steve, when you talk about, you know, we see strong growth in 27, 28, I mean, you're saying 28 is a growth year in that statement as well for SEMI and data centers, right?

Yeah, I was commenting on SEMI in particular when I made that statement. But we do believe it's a growth year for data centers as well.

Okay. All right. So, thanks. So, even though you can't put a number on it, 28 should be another growth year for your two largest segments. Okay. But you're well.

Yes.

Two most important segments for growth. Thank you. So the other question I had is more on math, if you don't mind, Paul. Was there like a credit, a non-GAAP credit that rolled through the earnings this quarter for taxes?

Yeah, there was actually a charge in taxes on a gap basis associated with a deferred tax asset that we had to write down a bit because we were able to lower our long-term tax rate in one of the jurisdictions. So we treated that as a one-time gap-only item, and so that's why our gap tax rate was higher at almost 24%, 23.7% versus our non-gap tax rate.

Okay, so if I were to reverse the sign on that number, essentially take a 30% hit on what your charges are, that would be like 30, 35 cents a share swing. Wayne, you're not saying that the non-GAAP is 30 to 35 cents higher because of that, are you?

I mean, we reported our non-GAAP number, which you see there, and in the tax, if you look at the difference between the GAAP tax rate and the non-GAAP tax rate, the GAAP tax rate was 15.7%, and the non-GAAP tax rate was 23.7%. I'm sorry, the other way around. Non-GAAP was 15.7, and GAAP was 23.6. And that was entirely a function of this one-time charge for non-cash charge for deferred tax asset that we wrote down because we're getting a lower rate in the future in one of our jurisdictions.

Our next question is from Elizabeth Sun with Citi.

Hey, good afternoon. Thanks for taking my question. I guess my first question is, in the longer term, for data center, I think you've talked about hyperscaler growth, you've talked about second wave of customers, and at OCP, you've showcased some, as Steve mentioned as well, you've showcased some solutions for 800 direct-to-server. So I'm just curious, as we're moving to 800 volts, is there any opportunities to further expand your customer base beyond hyperscalers and second-wave customers like Neocloss or Enterprise?

Yeah, thanks for the question, Elizabeth. Yeah, you're right. At OCP, we had a number of products on display. Probably the most important was something called the Power Distribution Board, which is designed for customers who are moving to 800 volts. Or to somewhere in between. So we see a lot of customers who are looking for transitional solutions where they may need to accommodate multiple power supplies, multiple different supply voltages. And so our power distribution board is interesting because it's modular and it's easily customizable. It's basically a mix and match approach to 800 volts and the interim solutions. What it features is best-in-class efficiency. We have 98% efficiency. Best-in-class power density, 350 watts per cubic inch. And then we can customize mechanicals, EMI performance, and obviously firmware. We also offer liquid cooling. So this is something that we're importing from our Plasma Power Group. And so we've got a pretty versatile solution for customers, and those customers include hyperscalers as well as second-wave customers. So there's quite a bit of interest in this modular approach to 800 volts.

It's great to hear. Thanks. And on growth margin, I think Paul used to guide exiting this year at 42 and then next year, 43. Seems like you are hitting 42 percent earlier than Yeah, you're right, Elizabeth.

We are hitting a little bit sooner. In fact, we guided Q4 now to 42 to 42.5, so actually over 42 percent that we said last quarter. At this point, we still think we have an exit rate of 42.5 percent. 43% next year. That could be slightly higher or could come a little earlier. It will depend on volume. And you're right, it's just under 50% leverage to gross margin, sort of in the high 40s, would be the drop-through rate.

Our next question is from James Rusciutti with Needham & Company. Jim, are you there? Thank you.

Your line is breaking up.

Yeah, is this any better?

Oh, much better.

Terrific. Yeah, questions about Thailand. And I'm wondering, Steve, if you could talk to how many customers or data center customers are qualified? How many hyperscalers? How many of the next tier? But it sounds like you're saying pretty good. You're making good progress there. One, so if you can give us any color on that.

Yeah, I'd be happy to, Jim. I was just out there a couple weeks ago, and I saw products coming off the line for two different data center customers, so they're already qualified. In addition, we'll have two of our top semi-customers qualified in the next two to three months. So, you know, we're starting out very strong in Thailand. It's a pretty impressive factory, quite frankly. It's 500,000 square feet on a single floor. So it's by far our biggest factory. The people I met were pretty amazing. You know, we have subject matter experts from around the world who are helping to bring that factory up to speed. We're employing our best in class techniques from around the world there. Warehouse is huge. And it's a linear flow. So it's warehouse to assembly to test to shipment. So it's really a showplace. And I think all customers will be eager to be qualified in that factory as soon as possible.

All right. You alluded to supply chain. Obviously, that's a topic for a lot of folks. Um, what, you know, are you experiencing any supply chain constraints across semi-data center or, for that matter, INM?

Yeah, the short answer is yes, but the longer answer is we've been, you know, encountering supply chain issues for most of the year, but we've had pretty effective mitigation techniques. You know, we put in place some strategic inventory based on our experiences during COVID, And our team's pretty good at chasing parts. And we've also put in place surge capacity because what we've found is many of these constrained parts don't get delivered until the last four to six weeks of the quarter. So we need to really push our production in the last half of some of that supply chain constraint that we won't be able to mitigate. And so we built that into our forecast for the fourth quarter and for 27. And so we see the problem areas being, you know, isolated components, particularly ICs. We see some constraints on PCBs and also specialty ceramics.

Our next question is from Shane Brett with Morgan Stanley.

Great. Thank you for taking my question. And my first question is on data center and your CPU opportunity. At your June quarter 2024 earnings, you talked about having 50% to 60% more dollar content in AI racks than we do with conventional server racks, which is still a lot of content. Is this still a valid metric in assessing your CPU opportunity? If not, how should I think about your content for CPUs versus AI accelerators? And could this sort of CPU or Gentic AI opportunity become a meaningful tailwind for your data center business in 2027? Thanks.

Yeah, thank you, Shane. I would say, you know, as power supply makers, we view any reason to build an additional rack as a good thing for us, essentially. So whether it's a GPU, a CPU, or some other type of chip, it generally drives more demand for power supplies and other power delivery products in these racks. So I think CPUs are a good thing for us.

Got it. For my follow-up, I want to ask about Semi. In prior cycles, market share between subsystems has been more due to their customers' performance. But just given the pace of revisions in this WFE upcycle, it does feel as though there will be a few suppliers that can't keep up. You've clearly put yourself in a great position, but do you think there will be share gains to come from readiness as well as scale, so kind of drivers beyond just technology wins? Thank you.

Yeah, Shane, that's an excellent question. And, you know, we have seen that, actually, because during COVID, I think we performed well from both a supply chain standpoint and an execution standpoint. And so I think that's benefited us over the past two to three years as we've been working with key customers to design in new products, because they know that we can build these products over time. And that's an important part of the equation. I think today what we're seeing is that we're out executing many of our peers, and we'd like to continue to be in that position. We've been recognized by some of our customers for our ability to keep delivering to their upside requirements over the past nine months. And so we're happy about that, and we think it's going to help us win new slots in the semiconductor segment.

Our next question is from Steve Barger with KeyBank Capital Markets.

Hey, thanks. Steve, it's really great to hear Thailand progressing so well. Seems like manufacturing capacity is going to be back ahead of demand in both DC and Semi, so my question is, does engineering bandwidth, again, become the scarcer resource? And are there any attractive programs today that you're being selective about as you manage those return on engineering resources?

Yeah, Steve. You know, I think engineering resources have always been the critical path for us, whether it's semiconductor or data center. I think for us, adding capacity is not that difficult. You know, most of the machines that we buy are available within three to six months. You know, the biggest hurdle was just building Thailand, and now it's open. And so I think we've got, you know, capacity that will get us through 28, 29 easily. So on the capacity side, I think we're good. I think from an engineering standpoint, yes, there are opportunities that we can address because of engineering bandwidth. But what we see are an increasing set of opportunities from our subset of hyperscale customers. You know, we continue to broaden our participation there, and our performance is helping us win more at those two customers, essentially. In addition, we have this long list of second-wave customers where we're getting design wins partially due to the technology, but also because they see our factories and like what they see.

Got it. So the factory is actually becoming kind of a competitive advantage for new product wins.

Yes, I think it is. And, you know, after visiting the factories a couple weeks ago, I could see where a customer would be pretty impressed by what we've done in Thailand and the improvements we've made in the Philippines. I think they're world-class factories.

Got it. And then you said the pace of distribution sales is outpacing your sales in I&M, which seems like a good sign. I know you've had a lot of design wins in recent quarters where you were just waiting for purchase orders to come through. Does it feel like that momentum is shifting more in your favor, broadly speaking, in I&M? And does – I mean, are you thinking about this in terms of multiple years of double-digit growth given the share gains and new product wins that you've locked in?

Yeah, I think in I&M, that's a distinct possibility. So we've gone through quite a transformation in our industrial medical business. You know, four or five years ago, we had some commodity business that was nestled in their industrial medical. That's all been eliminated. So everything you see today, all the growth is coming from high margin new products. And so we're getting a little bit of a tailwind, obviously, as the market recovers from the post-COVID inventory hangover. But most of what you're seeing from Advanced Energy and our outperformance is based on these new product wins we've been able to secure over the past two years. So we're pretty happy with the rate of growth in industrial applications in particular, as well as semiconductor applications where they're using basically industrial medical products. And finally, we also see some interesting things happening in medical. And so we're pretty happy with what's happening in INM, and we see this trend continuing, where we continue to grow sequentially for the foreseeable future.

Our next question is from Mehdi Hossein with SIG.

Yes, sir. Thanks for taking my question. A couple of follow-ups for me, Steve. Based on what your semi-OEM have reported, it seems like WFV in 2007 could be closer to around $200 billion, which implies a 30% to 35% year-over-year growth. What I want to ask you is the reference to your comment that 30% of your semi-cap revenue in 27 is driven by a new product. And given what your OEM have communicated, does that imply that your revenue in 27 will be much stronger than what your OEM are guiding for WFG growth? And I have a follow-up.

Yeah, okay, Maddie. First, let's go back to the new product statement. What I said was that in 2027, we expected more than 10% of our semi revenues to come from new products, which is our starting point on new products. I think at your larger question, you know, with the WFE and so forth, and are we going as fast as WFE? You know, if we go back to 26, and, you know, assuming that our current guides and key four is accurate, If we strip out our service business, the actual growth in our product revenue in semiconductor is roughly 45%. So, it's higher than the overall, you know, semi-growth rate because service just doesn't grow at the same rate as the product revenue does. As we look at 27, you know, we think we're going to grow as fast or faster than WFE. But more importantly, over time, with all these design wins that have been confirmed over the past few months, we think we could really, you know, outpace WFE over the next 5 to 10 years based on what we've been able to secure for leading-edge memory and logic applications.

And Steve, sorry, I missed up the 10, I confused the 10 with the 30%, but going back to the semi-cap, I can't stop thinking about the post-COVID and there was a mismatch of components for your OEM that had a ripple effect for subcomponent suppliers. And you did have a backlog given the shortages. And actually, some of the same customers are experiencing the same mismatch. To what extent are you working with your OEM customers to plan for these growth into 27 and avoid mismatches or avoid any delay in complete system shipment?

Okay, so just to clarify, you're talking more about downstream supply constraints that our customers may have as opposed to supply constraints that we have in Billionaire Boxes. Is that the question?

I remember back in 22, 23, you didn't have enough power management PNIC components. Your semi-cap OEM customer also had mismatches. So the mismatch was throughout the semi-cap supply chain, but it was more acute among your OEM customer. And I want to see what you're doing, what you're doing in collaboration with your OEM customer to avoid some of the challenges from back then.

Yeah, so basically with our large OEM semi-customers, we ship into JIT bins. And so our customers give us a target, basically, a low and a high. And we're allowed to ship into those bins as long as we keep the quantity within the low and the high targets. And so what I can say is we've been keeping up there. You know, that's why I've been recognized, you know, for our ability to keep up with our customers' demands. But, you know, I don't think we're close to the high end of those ship-in limits. So there's room for us to ship more, and, you know, that's something we could do. I would say we're a bit cautious. We don't want to get too far over our skis. We want to make sure the customer has a sufficient product from AE, but we don't want them to build too much inventory because we don't want to go through a correction phase.

Our next question is from Quinn Fredrickson with Baird.

Hey, good afternoon. Steve, you mentioned showcasing liquid-cooled power technology solutions for 800-volt at OCP. Our impressions, you may have been included in NVIDIA's MGX liquid-cooled reference architecture. Just any color on what that might mean for you, if so.

Well, it's always nice to be included in something like that. And, you know, we value NVIDIA as obviously a key technology partner. And hopefully, you know, other people look at that and realize Advanced Energy has some pretty advanced liquid-cooling technology, and we're ready to deploy it. So, yeah, I think it's great that we are recognized by NVIDIA as a technology partner.

Okay. Thanks, Steve. And then as we're thinking about your growth versus WFE for 27, you mentioned calculating it X service in 26. Is there any reason to believe the service business could see better growth in 27 than what you've seen here this year where it seems like growth has been a little light of typical? And if so, why would that be the case?

Yeah, if you think about service, it's really largely based on installed base, and there's some tradeoff between, you know, repair and non-break fix, depending on where you're at in the cycle. So, the simple answer is we would expect service to kind of grow in that, you know, mid-single digits to, you know, 10 percent every year, pretty much. So, we're not counting on a big service growth rate next year. Similarly, if we ever went into a downturn or when we do, that will continue to grow. So, I think you could assume the similar relationships next year to this year.

Our next question is from Brian Chin with Stiefel.

Hi there. Good afternoon. Thanks for letting us ask a few questions. Sorry I was hopping between calls, so apologies if there's any backtracking here. But maybe firstly on data center, in terms of the 27 commentary, it does sound like you're more constructive on data center growth in addition to semi-cap next year. Did I hear correctly that you expect strength from hyperscalers beyond your largest hyperscaler customer next year? And if so, can you expand upon that?

Yes, Brian. I did mention that we have two significant customers in hyperscaler. We haven't given out that number before, so it's very, very good that you picked that up. But, yeah, we're seeing strength with those two customers. Obviously, the revenue there could be complemented by revenue from second-wave customers as well, but we're not counting on the second-wave revenue to meet our outlook for next year. But, yeah, demand is very strong. In fact, we're actually having to airship some of our PowerSpy units because we can't keep enough in stock at the customer hub. That gives you some flavor for where we're at in the data center market. I appreciate that.

And then maybe on the semi-cap side of the business, clearly some strong tone in terms of the positioning over the next several years. Can you provide any more sort of granularity about maybe wins or kind of progress specifically on the oxide etch market in terms of maybe memory or other applications?

Yeah, I'd love to. So, you know, we've been talking about Everest, Evos, and NavX for the last few years. And the good news is, you know, we just want some major slots here just in Q3. And this is across the board, Everest, Evos, and NavX. And these are our high-volume opportunities, which will begin to ramp next year. So we think Conductor Edge, the new products, begin to ramp next year as some of these leading-edge processes start to ramp. And then we see our dialectic wins starting to ramp in 28. In addition, we've won key slots in deposition. And the common theme, I think, for all these wins is that this new technology is required at the advanced nodes to maintain or improve throughput and to maintain and improve yield. And so there's continuing to be a strong pull from customers. And the other thing we've noticed is once we win one design at a customer, it starts to multiply. And it multiplies across different processes. And in addition, sometimes there's an opportunity to back integrate the technology. Which is so going to more recent nodes if the end customer is having any issues with throughput or yield. So we think we're in a very good spot with these new products, and we think that they're going to form the basis for giving it market share gain over the next five years.

Thank you. Our last question is from David Dooley with Steelhead Securities.

Thank you so much for squeezing me in. And you partially answered this, but I was just kind of wondering what the key reason was that your semi-business's growth rate accelerated in the back half of this calendar year. You know, it's, I think, 60% or higher in both Q3 and Q4. You've just raised your guidance for the year to, you know, up substantially more than it was before. So could you maybe rank order what the key reasons are? Is it you're just catching up with customer demand or you're out-executing your competitors or share gains? And then I guess as a follow-up is, would you expect this kind of year-over-year growth to continue into the first half of next year, given they're pretty easy comps in the first half?

Yeah, I'll take a cut at that, David, and Steve can fill in any other color. I think the first thing is we are seeing stronger demand in the second half. And if you remember, we started off this year a little slower. We had tougher comps a year ago, and we said we expected semiconductor demand to accelerate in the second half. And that's exactly what we're seeing. In our case, we think we're keeping up with customer demand. And so that's resulting in higher numbers, both sequentially and year over year. And year over year, comps are a little bit easier. So that's helping. We do think that we've been successful and been recognized for being able to keep up with demand. And so we're not seeing those headwinds because of our strategies around inventory and capacity. And those things are helping. You know, going into next year, you know, we haven't guided exactly for how those revenue growth rates would look. But, you know, you would anticipate that if you had, you know, sequential growth, you know, in that market, even a little bit, you'd still have a pretty significant year-over-year growth. And so I think you could see that for another quarter or so.

I think the only thing I'd add is that I think we're also benefiting from increasing etch and depth intensity and also benefiting from the fact that most of the investment is going into leading is logic and DRAM processes where we tend to have more content.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. We thank you again for your participation.