Earnings Call Transcript - AEIS Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Advanced Energy Industries Fourth Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand today's conference over to your speaker, Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Thank you. Please go ahead, sir.

Edwin Mok, Vice President of Strategic Marketing and Investor Relations

Thank you, operator. Good morning everyone. Welcome to Advanced Energy's fourth quarter 2020 earnings conference call. With me today are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations. If you have not seen our earnings press release, you can find it on our website at ir.advanced-energy.com. There you can also find a slide presentation to follow along our discussion today. Before I begin, I would like to mention that Advanced Energy will be participating at several investor conferences in the coming months. As events occur, we will make that announcement. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance. Information concerning these risks and uncertainties is found in our filings with the SEC. All forward-looking statements are based on management's estimates, projections, and assumptions as of today, February 10th, 2020, and the company assumes no obligation to update them. Long-term targets presented today, which include our aspirational goals and our long-term vision goals should not be interpreted in any respect as guidance. On today's call, our financial results will be presented on a non-GAAP financial basis, unless otherwise specified, excluded from non-GAAP results, our amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains or losses, and restricted items. Detailed explanations on our non-GAAP financial measures, as well as reconciliations between GAAP and non-GAAP measures can be found in a press release today. With that, let me pass the call to our President and CEO, Yuval Wasserman. Yuval?

Yuval Wasserman, President and CEO

Thank you, Edwin. Good morning, everyone, and thank you for joining us on this call. Advanced Energy finished last year on a strong note with Q4 2020 revenue of $371 million, up 10% year-over-year, and solidly above our guidance midpoint. Non-GAAP EPS of $1.49 was at the top of our guidance range. The fourth quarter results were driven by strong demand for our products across most of our markets and good execution in an increasingly dynamic operating environment. Service revenue again set a record. Our Q4 results built on a great year of financial performance despite the global coronavirus pandemic that presented all of us with extraordinary challenges. I'm extremely proud of our organization's response to the constant changes throughout the year, demonstrating Advanced Energy's agility and operational excellence.

Paul Oldham, Executive Vice President and CFO

Thank you, Yuval, and good morning everyone. Before I begin, please note that all financial measures presented today will be on a non-GAAP basis unless otherwise stated. This quarter, our non-GAAP results also exclude $5.2 million of restructuring costs, primarily related to the previously announced closure of our Shenzhen facility and $3.8 million in non-cash unrealized effects losses related to long-term lease and pension liabilities. A reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today. We delivered outstanding financial results in the fourth quarter with revenue above the midpoint of our guidance and non-GAAP earnings per share at the high end of our guidance range. Despite the challenging environment, our team again executed very well, delivering strong customer demand, primarily in our semiconductor and industrial markets. Combined with synergies and good cost control, we achieved our second-highest quarter ever in operating income and cash flow generation and an annualized return on invested capital of over 20%. Fourth quarter revenue was $371 million, reflecting nearly 10% growth year-over-year, but down 5% sequentially from the record levels in Q3. Sales in the semiconductor were $166 million, up 32% from last year and almost flat to last quarter. Our full year and second half 2020 growth outperformed the market and industry again, as we continue to extend our leadership in semiconductor power. Our R&D investments during the last downturn are yielding tangible results with multiple new product introductions and a strong pipeline of design wins. Looking forward, we expect semi demand to grow sequentially in the first quarter and further accelerate in Q2 on continued strength and foundry logic and increased demand in 3D NAND applications. Data center computing revenue was $65 million, down sequentially as expected, as the market digestion that began in Q3 continued into the fourth quarter. Looking forward, we expect cloud digestion to continue to impact our data center computing revenue in the near-term, with increased investment and the benefit of new design wins driving higher revenues later in the year. Revenue from our industrial and medical markets grew 8% sequentially to $94 million. The better than expected performance was driven by growth across several applications, including motion control, photonics, and thin film coatings. Medical revenues declined as expected from a strong Q3 due to critical care demand beginning to normalize. Looking forward, we expect industrial and medical revenues to decline seasonally in Q1 versus Q4, but be well above the revenue level from a year ago. Near-term, the impacts from COVID will continue to pressure this market, but improved macro conditions should benefit our industrial applications over time. Telecom and networking revenue was $46 million in the quarter, down slightly from Q3 but up 20% year-over-year. Overall, global 5G investments outside of China are expected to remain relatively muted in the near-term. In addition, we expect our portfolio optimization actions to begin impacting revenues in this vertical as we pivot towards higher value applications. Non-GAAP gross margin for the quarter was 39.5%, down slightly from 39.8% last quarter on lower volume. Year-over-year, gross margins increased 360 basis points, driven by material cost improvements, product mix, and accelerated synergy actions, including portfolio optimization and productivity improvements across our factories. While we expect gross margin to decline modestly in Q1 due to lower volume and supply chain challenges, our planned synergy actions should further improve gross margins over the next several quarters, enabling us to sustainably achieve or exceed our initial gross margin target of over 40%. Non-GAAP operating expenses were $76.9 million, down $2 million from last quarter on lower variable expenses and timing of R&D project costs. Our team did a good job of controlling expenses during the quarter. As a result, operating margins for the quarter were 18.7%. Non-GAAP other expense was $2.3 million, including $1.3 million of interest expense. We expect other expenses to remain in the $1.5 million to $2 million range. Our non-GAAP tax expense was $9.9 million or 14.7%. Looking forward, we expect the GAAP and non-GAAP tax rate to remain in the 15% range. Non-GAAP earnings for the quarter were $1.49 per share, down from $1.66 last quarter on lower revenue, but up 71% from $0.87 a year ago. Turning to our full year 2020 financial results, revenue increased by 79% on an as-reported basis to a record $1.42 billion. On a pro forma basis, revenues grew 18% driven by 50% growth in semiconductors and 46% growth in data center computing, partially offset by declines in industrial and telecom markets, primarily related to COVID and macro factors. Our full year 2020 gross margin was 39%, approaching our initial long-term model of 40% after just the first full year of Artesyn integration. Gross profit dollars increased almost 70% from 2019. Leverage on sales growth and synergies from the Artesyn acquisition resulted in operating income more than doubling to $244 million or 17.2% of sales. As a result, 2020 non-GAAP EPS was a record $5.23 per share, up more than 110% from $2.44 in 2019. Turning now to the balance sheet, we ended the fourth quarter with cash and marketable securities of $483 million, up $51 million from Q3. Inventory declined by $35 million and turns increased to 4.1 times due to timing and actions taken to structurally improve our inventory management. This improvement was largely offset by a reduction in accounts payable on lower purchases and associated DPO of 50 days. We expect both inventory and payables to increase in Q1, largely to manage supply chain constraints. Receivables decreased on lower sales, and DSO rose slightly to 57 days. Total days of net working capital were 95, up two days from last quarter. Operating cash flow from continuing operations was $67.1 million, just below the record level we generated last quarter. Full year operating cash flow was a record for the company at $202 million. Free cash flow from continuing operations was $56 million in Q4 and $166 million for the full year. Capital expenditures for the quarter were $11.3 million and depreciation was $7.3 million. We continue to expect capital expenditures to be about 2% to 3% of sales. During the quarter, we also repaid $4.4 million of principal amortization on our debt, ending with total bank debt of $322 million and net cash of $161 million. Our trailing 12-month gross debt leverage decreased to 1.2 times. During the quarter, we did not repurchase any stock. Finally, as announced last week, we declared a quarterly dividend of $0.10 per share, which will be paid to shareholders of record as of February 22nd. Now, let me turn to guidance. Overall, we expect Q1 demand to remain strong, with sequential growth in semiconductors, partially offsetting seasonal declines in industrial and medical and the impact of portfolio optimization in telecom and networking. Data center computing revenues are expected to be at similar levels as Q4. On a year-over-year basis, we expect solid growth across all our market verticals, except data center computing due to the market digestion following a strong ramp last year. While we see strong demand for our products, the ongoing risks related to COVID-19 combined with global supply constraints in the electronics industry could impact our ability to fully meet this demand in the near-term. Factoring these risks into our forecast, we are guiding Q1 revenue to be $350 million plus or minus $15 million. Based on lower volume and higher supply chain costs, we expect non-GAAP gross margins to be 38% to 39%. Operating expenses are expected to be up slightly due to increased R&D investment. As a result, we expect non-GAAP earnings to be $1.25 per share, plus or minus $0.15. Before I open for questions, I would like to share some of my perspective on our business. As our 2020 revenue growth demonstrated, Advanced Energy is well-positioned to benefit from the secular growth trends across our markets, while also gaining market share and expanding into new market opportunities. The doubling of our earnings reflects solid execution by our team, our ability to deliver on our synergy plans, and the operating leverage in our model. Looking forward, we are as excited as ever about the demand prospects for our business, as we should have tailwinds across our markets in 2021. Although the impacts of COVID and challenges in the global electronic supply chain may impact us over the next couple of quarters, we remain confident in both delivering growth in 2021 and meeting our new three-year aspirational goals of $1.65 billion in revenue and $7.50 in non-GAAP EPS, and in achieving our long-term vision of $2.5 billion in revenue and $12 earnings per share over time. Finally, I would like to extend my personal thanks to Yuval for his vision, leadership, and commitment to Advanced Energy as he led the transformation and success of the company. I have personally enjoyed working with Yuval immensely over these last few years and wish him well in this new chapter of his life. I equally look forward to working with Steve Kelly, and I'm confident in his ability to lead Advanced Energy to the next level of success. With that, let's take your questions.

Operator, Operator

Thank you. And your first question is from the line of Mehdi Hosseini.

Mehdi Hosseini, Analyst

Yes. Thanks for taking my question and best of luck to you, Yuval. I have one question for Yuval and I want to better understand what instigated the change in the CEO role, understand the succession plan, but I'm kind of surprised given your aspirational goal. So, if you could provide us with some color will be great. And then in terms of your report, how should I think about your traction in Japan, you talked about continued share gains, especially in semiconductor? And I want to see how you're tracking with the share gain, specifically in the Japan region? Thank you.

Yuval Wasserman, President and CEO

Thank you, Mehdi. Regarding my decision to retire, it is really part of our standard succession planning process. Full disclosure, I'll be turning 67 years old this year, and my plan is to spend more time with my family, friends, and pursue some of my personal interests. I've been working very closely with the Board to identify the person that will have the right profile and attributes to continue to lead the company and pursue the strategy that we can put together. And as I said earlier, we found these attributes with Steve Kelly. We're excited about Steve joining the company. We believe that he has all the capabilities, skills, experience, and track record to do just that. Regarding our market share gains, as you know, 2020 was an amazing year for us. We introduced a tremendous amount of products, I think more than any other company in our space in 2020, while managing the company through COVID-19. Some of these products are enabling, especially in the semiconductor industry, and some of these products will enable the next generation technology nodes, especially eVoS, MAXstream, the RFDS. We continue to gain traction, we continue to gain share. And one area that is really a unique strength of Advanced Energy is our RF matching networks. We are the world leader in RF matching, which is really critical for the ability to deliver effectively RF power into the plasma. This is another area as we continue to grow, gain traction and gain share. Specifically regarding Asia, we continue to have good design wins in Asia, as I reported. Specifically to Japan, we are an increasing player in Japan, with higher levels of traction in very advanced applications and beyond that, I cannot share any more information.

Mehdi Hosseini, Analyst

Got it. Thank you.

Yuval Wasserman, President and CEO

Thank you, Mehdi.

Operator, Operator

Your next question is from the line of Scott Graham with Rosenblatt Securities.

Scott Graham, Analyst

Yes, hi and good morning. And Yuval congratulations, I know we've only known each other for a short while, but obviously, the track record here has been terrific and you've really transformed this company. So, congratulations and best of luck.

Yuval Wasserman, President and CEO

Thank you so much. Thank you very much.

Scott Graham, Analyst

So, I wanted to maybe talk about the three-year goals as well and maybe kind of piggyback on the prior question. So, why would we be putting these out now in front of the change at the top, particularly since if I may, the EPS growth target, which I assume is for 2023 is a pretty healthy target. Could you talk through why we would be releasing this today rather than maybe waiting a quarter for Steve to have full input?

Yuval Wasserman, President and CEO

So, really, really good question. So, as I said earlier, the hiring of Steve was driven by a process that is a standard succession planning process. When we talked to the Street about updated aspirational goals three years out, we at that point did not conclude on a successor. So, in terms of timing, our decision to onboard Steve to the company came after our announcement of the aspirational goals. So, there's nothing shifty or tricky about it. The decision about my timing of retirement was driven by identifying the right successor, right? And if we didn't identify the right successor, I probably would have stayed here for a longer period of time. So, the timing of my retirement was driven by identifying Steve. Does that answer your question?

Scott Graham, Analyst

Yes, it does. For the most part, if I could just add one more point here. You're being advised not to inquire about the results, which I believe are quite clear. You had a good quarter, and the guidance is straightforward. Perhaps another question regarding the long-term perspective: you are ahead of schedule with the integration of Artesyn, and your balance sheet is back to a net leverage basis and quite liquid. Will this change, with Steve coming on board, potentially slow down the M&A process as he familiarizes himself with everything? Do you think there might be a slowdown here? I had anticipated that 2021 would be a significant year for M&A for your team.

Yuval Wasserman, President and CEO

Yes. Good question. So let me give you a little bit of background, right. The board has approved our strategic plan. The board has approved long-term goals. The board has approved the transition of CEO. And me and the board together decided on hiring Steve and bringing Steve to the company. Steve had a great opportunity to review the company strategy, to review our strategic goals, to review our aspirational goals both three years out and seven years out. And after doing that, he excitedly decided to accept our offer and join the company. I do not expect to see any major deviation from our strategy going forward. Our business model, our financial model, our operational model have proven themselves over the last six years to be extremely capable, yielding results normally ahead of plan. And, yes, we are very acquisitive, and we do have a very healthy balance sheet with dry powder that will allow us to continue to pursue inorganic growth. Steve has great experience in his previous position at EMCOR to go and pursue inorganic growth, acquiring companies, effectively integrating them, increasing value and delivering really strong shareholder value. So from my vantage point, and after talking to Steve during the process of hiring him, Steve is fully aligned with our long-term strategy and our long-term aspirational goals and, again, supported by the board. Last comment, Steve and the management team compensation plans is linked directly to our long-term goals and objectives.

Scott Graham, Analyst

That's very clear. Yuval, again, congratulations, thank you for the answer and great job in transforming this company.

Yuval Wasserman, President and CEO

Thank you very much. I really appreciate that.

Operator, Operator

Your next question is from the line of Tom Diffely of D.A. Davidson.

Tom Diffely, Analyst

Yes, congratulations from me as well. Yuval clearly.

Yuval Wasserman, President and CEO

Thank you, Tom.

Tom Diffely, Analyst

…a nice turnaround at the beginning of the story, and then really impressive growth in recent years, so a job well done.

Yuval Wasserman, President and CEO

Thank you, Tom.

Tom Diffely, Analyst

My pleasure. Looking at the end markets, it sounds like it dropped off a bit in industrial medical, is that purely just seasonality? Is there anything beyond that? And then adding to that, on the telecom networking side, it sounds like you're trimming your portfolio a bit any more color on that would be helpful?

Yuval Wasserman, President and CEO

Sure. The medical industry does have seasonality, and our medical business was significantly impacted by COVID-19. Last year, we experienced a surge in demand for critical care equipment that relied on our power supplies as the world sought ventilators and essential equipment. Conversely, elective procedures declined, which posed a challenge. It's important to note that our medical business was nonexistent three years ago; we only recently entered this market, and it's been growing as part of our strategy. Looking ahead, we anticipate ongoing growth in the medical sector, driven by design wins and entry into new applications, including sophisticated diagnostic equipment. I'm also excited about our acquisition of Versatile Power, which we discussed about 18 months ago during our analyst day. We identified a segment in medical that we wanted to target, specifically RF power supplies for medical use. Versatile Power brings substantial knowledge, experience, and expertise in RF power supplies for highly invasive procedures. We acquired them to speed up our market entry, as they are a recognized supplier to a leading company in this field. This acquisition allows us to combine their expertise with our scale to enhance growth and utilize Advanced Energy's global infrastructure. In the general industrial sector, we expect our business to operate and grow at above GDP rates. We are focused on a portfolio optimization strategy that includes phasing out certain end-of-life products, increasing prices in select areas, and shifting towards higher value-added products, shifting our gross margin curve to the right, and we are making significant progress. Telecom and networking, which we mentioned earlier, is a key focus area for us in 2021. While our strategy aims to cover a broad range, we are also applying an 80-20 approach to eliminate less healthy products and continue transitioning to high-value solutions. Did I miss anything?

Tom Diffely, Analyst

No, that's helpful. Maybe just as a quick follow-up, Paul, can you give us a feeling for how much lingering cost there is from COVID, both in your OpEx and maybe even in your supply chain?

Paul Oldham, Executive Vice President and CFO

Yes, we've talked about that kind of running in the 50 basis points range, and it bounces around a little bit more or a little bit less. As I mentioned in our prepared remarks, we are seeing some headwinds on supply chain costs specifically related to some of the logistics and shortages as a key part due to higher global demand and, in part, due to the fact that COVID still has many suppliers running below full capacity. So it continues to be a bit of a headwind focus in that range.

Tom Diffely, Analyst

Okay. Thank you.

Paul Oldham, Executive Vice President and CFO

Yes.

Operator, Operator

Your next question is from the line of Quinn Bolton of Needham & Company.

Quinn Bolton, Analyst

Thanks for taking my question, and Yuval, congratulations on your retirement, and thanks for your leadership over the past several years. Paul, wanted to start with you on your comments about the costs in the supply chain, potentially some shortages, wondering if those component shortages are limiting your ability to meet demand in the first quarter? Or does your operations team able to get all of the semiconductor components you need for the power supplies to meet customer demand? And then I've got a follow-up question.

Paul Oldham, Executive Vice President and CFO

Yes, when we discussed our guidance, we aimed to be transparent about our strong demand. However, we are facing challenges related to the supply chain and securing enough parts. This is an ongoing issue that we manage daily. We've structured our guidance to reflect the current environment, which is affected by widespread challenges in the microelectronics and electronics industries. In the short term, we anticipate these issues will hinder our ability to deliver products, and this is factored into our projections.

Yuval Wasserman, President and CEO

So, the forecasts and the guidance are risk-adjusted to reflect that Quinn. And we have the benefit of reporting later in the month. So we have I think a better visibility of what's happening in the market. And it's not across everything in the supply chain. It's really a few components, just a few components, IC components that affect us, the automotive industry and other industries. Obviously, you need all the bonds to be able to build the product. So the good news is we have really strong demand. And as I said earlier, our semi demand is growing in Q1 and we expect it to accelerate in Q2. Short-term, our guidance reflects the risk adjustment related to shortage in ICs.

Quinn Bolton, Analyst

Great. Just a follow-up on that, just wondering in your conversations with supply chain, how long do you think that they will be capacity constrained, if they can take probably six to nine months sometimes to bring on additional way for supply, so I'm wondering if you think it could be an issue you're facing for most of the year? And then my second question was going to be just around, Yuval, that you update on the 48-volt power shelf business, it sounds like you're securing some additional design wins. But just wondering if you could give some more color on the 48-volt power shelf opportunity and sort of design win status? Thank you.

Paul Oldham, Executive Vice President and CFO

Yes, that's a good question, Quinn. It's certainly a challenging one to answer. Everyone across the supply chain is collaborating to secure more parts, and as you've mentioned, the demand is still on the rise. This situation won't be resolved in a week, but we don’t view it as a long-term problem either. We will be keeping a close watch on it. We experienced something similar last year with the onset of COVID, which took us a few quarters to catch up to the demand in the factory. We’ll see how things unfold, but this is definitely a major focus for us and for the entire industry.

Yuval Wasserman, President and CEO

Quinn highlighted two distinct achievements related to the 48-volt technology. The first is securing a new hyperscale customer for our 48-volt power shelf, which serves as a power supply for racks hosting multiple servers. The second achievement involves a board mount design that converts 48 volts to 12 volts as a DC-DC converter, which is integrated directly into the server rather than the shelf. These two wins represent different application areas. We have a long history of designing 48-volt modules in the telecommunications networking sector, equipping us with the expertise and technology to quickly transition into the data center application space. Although mass production will take time, these achievements validate our technology and align with our long-term goal of generating an additional $100 million in annual revenue by 2023.

Quinn Bolton, Analyst

Excellent. Thank you and congratulations again, Yuval.

Yuval Wasserman, President and CEO

Thank you, Quinn.

Operator, Operator

Your next question is from the line of Krish Sankar of Cowen and Company.

Krish Sankar, Analyst

Hey, hi. Thanks for taking my question. And Yuval congrats on the solid term at Advanced Energy.

Yuval Wasserman, President and CEO

Thank you so much.

Krish Sankar, Analyst

Thank you. And I have two questions. First was on semis. You spoke about sequential growth in Q1 and Q2. Is it mainly a function of NAND spending moving through the system? Or are you seeing like other aspects of WFE giving you the strength in Q1 and Q2?

Yuval Wasserman, President and CEO

I believe the drivers in the semiconductor market, particularly for NAND and foundry, are noticeable. Additionally, we have some unique factors pushing our business in the semiconductor sector. We have seen our RF matching business grow faster than the overall market thanks to new product launches, and we anticipate further growth. We are also increasing our share by cross-selling embedded power supplies into the $300 million serviceable available market in the embedded power application area within the semiconductor industry. Therefore, we have several factors contributing to our business growth. From our perspective and based on the information we have, we expect demand to remain strong in the first quarter and to accelerate in the second quarter. The main challenge for everyone right now is whether we can obtain the integrated circuit components necessary to deliver our products on time. However, the demand is robust and encouraging. We expect 2021 to be a growth year for us overall. Currently, the semiconductor sector is experiencing a significant increase in demand.

Krish Sankar, Analyst

Got it. Very helpful, Yuval. And then a quick follow-up. Today you provided some insights on the data center and the dilution you are experiencing there. I believe you mentioned in your prepared comments that it should improve later this year. I'm curious about what the catalyst or leading indicator is that you're looking for. Is it more related to IT enterprise budgets improving, or what are the key drivers for the data center to recover in the second half?

Yuval Wasserman, President and CEO

The industry is currently launching and adopting new microprocessors, which is driving a significant amount of buying demand in data centers. We are in a unique situation; we started from scratch just two years ago and achieved a growth rate of 250% in 2020, establishing ourselves as a legitimate leading player and gaining market share by displacing established competitors. However, we are still a newcomer and lack a strong presence among the major Tier 1 and Tier 2 hyperscalers. This contributed to our rapid growth in 2020. As the industry undergoes a period of adjustment, our market presence remains limited. We anticipate that the industry will grow later this year, and we expect our growth trajectory to continue over the next few years as we transition our design wins into mass production and revenue. We have secured additional design wins with top-tier hyperscalers, which we expect to convert into revenue later this year.

Krish Sankar, Analyst

Got it. Got it. Thanks, Yuval, and congrats again for everything you've done for Advanced Energy.

Yuval Wasserman, President and CEO

Thank you, Krish. Appreciate it.

Operator, Operator

Your next question is from the line of Amanda Scarnati of Citi.

Amanda Scarnati, Analyst

Hi, good morning. First off, Yuval congratulations and enjoy retirement.

Yuval Wasserman, President and CEO

Thank you, Amanda.

Amanda Scarnati, Analyst

I want to follow up on the topic of DC digestion that you just mentioned. Should we consider this similar to semiconductors, where we experience a significant increase in inventory builds in data centers followed by a lengthy digestion period? Or is it more about being early in the development of this market, suggesting that it won't progress as expected? How should we interpret this in terms of cyclicality or irregularities as we move forward?

Yuval Wasserman, President and CEO

Yes, that's a good question, Amanda. I think it's both. There is definitely digestion in the market. As you heard from Edwin last time we talked publicly, the timing of Intel's transition to new technology affected the whole market, and this transition to new microprocessors impacted buying decisions. These are significant investments, and they typically follow a pattern of large investment digestion. If we were present in all the players today, we would see fewer fluctuations because not all of them experience changes simultaneously. The reality is that we have only a third of the market and are growing, which makes us a bit more susceptible to these expansions and contractions as we grow. As we continue to shift our design wins into mass production, we will become more diversified and less affected by fluctuations.

Amanda Scarnati, Analyst

Great. And then switching over to the semiconductor side. Can you talk about any sort of pull-ins that you might be seeing or unusual demand on the OEM side and how if at all, you're handicapping SMIC and China generally in your guidance?

Yuval Wasserman, President and CEO

I don't think that we saw any abnormal behavior in the semi business. The way we operate with our key customers in semi is based on just in time. They pulled our product from the hub when they need them. They give us demand signals and indicators going forward. And what we see right now, as I said earlier, is real demand growth that is right now on a short-term affected by the availability of IC components that we all need, including the automotive industry, we all need to build products. Regarding SMIC, honestly, right now as we look at SMIC, we cannot comment on SMIC and I think everybody including our customer is trying to get a license to ship product to SMIC. So I don't think at this stage, we can comment on that.

Amanda Scarnati, Analyst

Thank you.

Operator, Operator

Your next question is from the line Pavel Molchanov of Raymond James.

Pavel Molchanov, Analyst

Thank you for your question. One significant development since the last earnings call is President Biden's inauguration and the potential for trade normalization between the US and China. I would like to know if you have encountered any regulatory or other challenges in the Chinese market as a US company, and what changes would be considered significant from Advanced Energy's standpoint?

Yuval Wasserman, President and CEO

Thanks, Pavel. I don't believe there will be any changes at Advanced Energy due to the change in administration. We are particularly proud of our decision from two and a half years ago to diversify our operations globally, focusing on a business continuity strategy that led to the establishment of our factory in Malaysia, well before the discussions around elections began. This strategy was designed to ensure our ability to respond to geopolitical and political shifts, as well as IP risks. Our current global footprint enables us to be very flexible in collaboration with our customers regarding where to produce and ship our products. For example, we can manufacture in China for the Chinese market or produce outside of China for other markets, all while complying with local regulatory requirements. Our success last year amidst the challenges of COVID-19 can be attributed to this nimbleness, flexibility, and agility. We are not overly concerned about the administration change and believe it will take time for any decisions to be implemented, and we are prepared to adapt as necessary.

Pavel Molchanov, Analyst

Okay. That's helpful. Follow-up question on the dividend. At the time that you guys were setting the rate, $0.10 a quarter, obviously, the stock was quite a bit lower than it is today. So, the yield now is, barely 0.3%. Are you ready at this stage to commit to a progressive dividend policy? You don't need to say how big the increases will be, but just will there be a plan to raise the dividends? You know, with earnings or some kind of annual roadmap over time?

Paul Oldham, Executive Vice President and CFO

Yes, it's a good question. Obviously, that's a decision that we would revisit over time, and the board will revisit, but when we introduce the program, we actually said that there's room for that to grow. So, obviously, there's no specifics around that, but there's certainly room for that to grow over time.

Pavel Molchanov, Analyst

I'll leave it there. Thank you, guys.

Paul Oldham, Executive Vice President and CFO

Thank you.

Operator, Operator

Our next question is in the line of Paretosh Misra of BCM.

Paretosh Misra, Analyst

Great. Good morning. Thanks, guys. So just wanted to circle back from this news flow about chip shortages and was just wondering, if there's any role Advanced Energy can play in terms of helping customers increase production? So anything that basically that can be done from the power supply side that can boost their productivity?

Yuval Wasserman, President and CEO

If end-use customers decide to expand their capacity to meet the increasing demand for IC devices, we will benefit because our power supplies support these semiconductor processing tools and technologies. While we cannot change the market dynamics, we can react swiftly to changes. I have witnessed similar situations during my 38 years in the semiconductor industry, where component shortages have led to intensified efforts and sometimes increased costs to secure components from various sources. Concurrently, we often see companies ramping up their capacity, quickly acquiring equipment to enhance their fab capabilities. It’s a very dynamic environment, and we are prepared for it. Our supply chain management team is agile and sophisticated, enabling us to respond effectively.

Paretosh Misra, Analyst

Thanks. Thanks for all these details. And I guess, the follow-up for Paul, for modeling purposes, any changes to income statement items like depreciation SG&A, tax rate, relative to Q4 that you think is worth flagging, as we think about Q1 and beyond?

Paul Oldham, Executive Vice President and CFO

Yes. We tried to comment on that in the prepared remarks. But there should, just I'll say, generally speaking, a lot of change. We talked about OpEx up slightly. We talked about the tax rate staying in the 15% range. So no, no, no big changes in those various line items.

Paretosh Misra, Analyst

Thanks, Paul. And again, congrats to you all for all that you achieved in your career and all the best for the next phase in your life. Thank you very much.

Yuval Wasserman, President and CEO

Thank you very much, Paretosh.

Operator, Operator

Thank you. Our next question comes from a line of Weston Twigg of KeyBanc Capital Markets.

Weston Twigg, Analyst

Hey, thanks for taking the question. Real quickly, the semi cap demand sounds extraordinarily strong in the first half of the year; you said it's accelerating in Q2. And I'm just wondering, I don't know what your visibility is? I know it's typically not more than a quarter or two. But regarding the second half, do you think that acceleration continues? Or do you see any signs of moderation from your customers?

Yuval Wasserman, President and CEO

Well, I don't think we have that visibility. And I cannot comment on the second half. In general, as you heard from our partners and customers, the expectation and general consensus is 2021 is going to be a growth year, an exciting year in semi. We agree with that. We support that. The one thing that became clear to us as we speak is that this demand in Q1 will accelerate in Q2 and we have enough demand signals that allow us to say that. The demand is strong in Q1 and growing in Q2. And as I said earlier, it's all about the ability to deliver on time to this demand. And it has to do with the shortages we talked about, I can't comment on the second half. I can tell you again, 2020 year, 2021 will be a growth year for the industry and will be a growth year for Advanced Energy.

Weston Twigg, Analyst

Okay. That's helpful. And then just finally, virtual power, can you tell us how much of a revenue contributor that is?

Yuval Wasserman, President and CEO

The acquisition was an example of tuck-in acquisitions of unique technology and products with special capabilities. This partnership establishes a significant relationship with one of the leading surgical equipment companies globally. Moving forward, we anticipate growth driven by our scale, footprint, and market outreach.

Weston Twigg, Analyst

Okay. That's helpful. Thank you.

Yuval Wasserman, President and CEO

Thank you.

Operator, Operator

Thank you. And that does conclude the Q&A portion of today's call. I will now turn the call back over to Yuval Wasserman for any closing remarks.

Yuval Wasserman, President and CEO

So, I’d like to thank everybody for your support and engagement and partnership over the last six years or six and a half years. It's been a pleasure to get to know you all and work with you. I'm excited about the future of the company. I'm excited about Steve Kelly joining us. He brings all the attributes to be a great success to take the company to the next level while I'm fading away and pursuing my personal interest. I will remain in the company until March 2022 to support the board and Steve. Thank you again, and have a nice day.

Operator, Operator

Thank you. This does conclude today's conference call. You may now disconnect.