Advanced Energy Industries Inc (AEIS) September 10, 2026 Conference Transcript

Everyone, welcome to the last day of Citi's global TMT conference. My name is Elizabeth Sun, and I'm in the Citi Semi and Semi-Cab research team. Today with me is Advanced Energy. Joining me on the stage, we have Steve Kelly, President and CEO, Paul Oldham, Executive VP and CFO. And in the audience, we have Edwin Mock, Senior VP of IR. And before we begin, I believe Paul has a few comments regarding Red FD.

Great. Thanks, Elizabeth. And thanks, everyone, for joining us. Just a reminder, today, any statements we make are subject to a number of risks. You can find those risks articulated in our recent SEC filings. Also, we reported our Q2 earnings on August 3rd of this year. And today, we will not be providing any updates, guidance provided at that time.

All right. So, Steve, let's start with some questions on your semis business. After delivering a meaningful semi-upside in Q2, you raised your second half guidance for semi to grow almost 50% year over year. I think earlier this year, there was a lot of concerns around ER being very kind of conservative on guiding the semi's growth. So what changed over the course of the past six months, and what gave you the confidence to revise up the semi's growth this year?

Yeah, thanks, Elizabeth. I think what we saw in the first half was an increase in our customer confidence over the next two years and also an increase in their forecast. And so we saw a number of new orders that came in that gave us a lot of confidence in the second half as well as in 2027. So one of the actions we took in response to those increased forecasts was to accelerate the opening of our new factory in Thailand. So in Thailand, we're just opening a 500,000-square-foot facility, and we'll be launching that facility with our largest customer's semiconductor as well as our largest customer's in data center. So that's a very good sign for future demand.

And we'll get to the facility part a bit later. But staying in the SEMIS business, if we look beyond 26, you just touched a bit on 27 looks good as well. You know, for components, guys, like you, you typically outperform in the WFE, early part of the WFE upcycle. So if we look beyond 26, looking into 27, what will drive this kind of momentum for you to outperform WFE?

Yeah, so what we're being told by our customers is they have good visibility for the next two years. That's a lot of visibility. And they're also telling us they're constrained by available fab basis. So as their customers are able to accelerate the build-out schedule for new fabs, for advanced memory, advanced logic, that's an upside for our customers, upside for us.

And normally, your customers typically build inventory at the early part of an upcycle. But I think you talk about you're largely shipping to customer demand. I was wondering why this time is different, why the customers are not really building inventories.

Yeah, you know, I think it's interesting phenomena. We think we're shipping to demand and not into inventory. And, you know, I also look at how we manage our supply base. And we learned a lot during COVID about managing our supply base. We divided the suppliers into two categories, the reliable ones and the not-so-reliable suppliers. And so if you're a not reliable supplier, we'll typically put in place more inventory to give us some insurance against execution challenges. I think the same phenomenon happens with our customers. I think advanced energy is perceived as a reliable supplier. We've got very strong factory infrastructure. We're successful in managing our supply chain. So they have to put in place less inventory as insurance or short for all some advanced energy. So I think we're in the good supplier category, and therefore our suppliers or customers don't need to put in place a lot of inventory.

And what is your lead time?

The lead times?

Yeah, within the same.

Yeah, so in our semi-business, we typically operate on a just-in-time model with our largest customers. So there's no lead time per se, but we know what they need, and when they need it, we're able to keep up with that.

Good to hear. And I want to touch base on the new products we've talked about for the past two, three years, Evolz, Everest, NetVax. I think good feedbacks continue to be good. Can you remind us where are we on the ramp, and are you expecting them to start contributing more on the growth or shared gains next year?

Yeah, we're very enthusiastic about the customer acceptance of our new technologies, namely Evos, Everest, and NavX. And where those technologies are used is leading edge. So today we're being designed into sub-2 nanometer applications, logic for instance. And so we expect those products to become more meaningful from a revenue standpoint next year. We're already seeing shipments this year, but compared to the overall shipments we make, they're not that meaningful. But we're very encouraged at the adoption of these technologies, leading-edge logic and leading-edge memory, because they're necessary to maintain throughput and yield at these very advanced geometries.

I'm curious, within that ramp next year, how much of that is driven by continuous slot wins and how much of that is driven by new like sockets?

Yeah, so as you see the ramp this year, that's almost all older technologies. There are existing wins from many years ago where our customers are ramping to volume. I think as you move into 27 and 28, you'll see a more significant percentage of the buy coming for new products as those new processes ramp to volume.

And in a longer-term question, and as semi-processes become more complex, you talk about, like, sub-to-nanometers processes, you need more edge and deposition steps, have higher aspect ratios, and you need more, maybe, like, demanding process control. So overall, how do you think that does that translate into the power demand and specifically for AES products?

Yeah, obviously higher etch and depth intensity is great news for us. It's great news for our customers, too. And the reason why there's higher etch and depth intensity is there's more process steps. So the end customers, the fab operators, are trying to build very complex structures, very fine geometries. So this requires a lot of steps, and that drives the etch and depth intensity. But in addition to that, the technical challenges of dealing with these structures require higher power from our products, sometimes multiple frequencies, and also more advanced metrology. So all these capabilities are built into our boxes, and they drive higher prices. and just final final question on this semi side i think you talk about uh you're starting to gain some traction on the testing side so can you talk about like what what do you provide there is that how is that different from uh the front and for the front end guys and then like uh what's your what's the what's the expectation of the the rent yeah yeah you know it's uh it's interesting our heritage has been in plasma power very very uh strong technical challenge helping our customers plasma lit inside plasma chambers but over the past few years we've put more emphasis on what we call our system power business this is basically the box between the wall and and the demands have become increasingly complex particularly as we move into the ai testing challenges so we've had significant success there getting our products designed into those those testers, burn-in ovens, other applications where our customers need reliable system power.

And should we expect this demand to go up with, to grow with kind of this testing, or is it more about shared gains?

Yeah, we haven't modeled exactly how it's going to grow, but what we know is we continue to expand capacity every quarter for these test applications, So it's a very good business for us, and it drives margins similar to what we have in the plasma power business.

And switching to data center side, and apparently you guys are a data center company now. So data center revenue more than doubled in 25, and you're talking about you're guiding more than 50% growth in 26. So for 26, I'm curious, is the growth smooth from continued build out in your top customers, in one top customer in data center? Or is it also a broadening of your positions in the other hyperscalers?

Yeah, so in 26, what we've seen is a ramp based on our hyperscaler customer only. So we've talked about a second wave customer set, but we don't see meaningful revenue from those customers until 27 and 28. But what happened in 26 was a number of our wins from 2025, the design win. ramping to volume these uh these winds typically carry higher asps because they're driving higher power requirements and so it's basically um our ability to execute with a chosen subset of hyperscale customers that's driving our revenue growth and just to that higher asps can you help us understand like directionally how does that uh pricing increase generation regeneration or like year by year uh like give us a range of this uh yeah yeah so uh the the cadence right now is every year a new solution is required that's loosely tied to uh new introductions from nvidia and other their suppliers and so the power requirements go up every year but um the space that we have to operate in doesn't change and so basically we have to deliver higher power same size box and that's called higher power density so the the challenge is how do you do that increase the power density you maintain high efficiency very high reliability so that's the technical challenge and that's where advanced energy shines essentially so that's why customers come back to us because as we deliver a very reliable, efficient, and high-power density solution.

And you have one customer that is maybe like more than half of your data center revenue. Just wondering, are you continuing to gain new contents, new sockets at that top customer?

Yeah, we focus on a subset of customers, and we're gaining share at those customers. And each of those customers has a wide variety of applications that we're designed in. So even though we're highly customer-concentrated, within those customers, we have some diversification across different applications.

And you talked about a second wave of customers earlier. How different is that opportunity from your existing hyperscaler business in terms of product requirements, customer concentration, and content for AE?

Yeah, so when we deal with hyperscale customers, they require a high degree of customization. So it's very engineering-intensive effort. That's why we've basically constrained ourselves to a subset of hyperscale customers, because we don't want to get overextended there. I think that's been a good strategy for the company. As we look at the second wave customers, these customers will typically take standard products from us with some minor modifications. So the engineering intensity is much less for our second wave customers. And so this allows us to engage with them without overstretching our engineering.

And does that give you a higher margin, in a sense?

What we see is the margin is very similar to what we have with our hyperscale customers. But obviously, since the engineering intensity is less, I think the operating margin is probably a bit better with our second wave customer.

And how big is that opportunity, the second wave customer? I think you talk about it could be as similar size to one big hyperscale customer, but when do you expect to reach that level?

Yeah, yeah, we have said that in aggregate, we think the second wave customers could be as big as one of our hyperscale customers. We expect to reach that probably sometime in the 28, 29 timeframe.

Hard to gauge exactly. um but we're we're very enthusiastic about the second wave customers as as a way to diversify our customer risk good to hear and i do want to ask on 800 volt there is a lot of questions around this and i'm sure you are receiving a lot of questions on this as well the first is you know as power architecture moves from uh 800 volt how do we how should we think about the change in advanced energy's dollar content both in the per rec level and also per megawatt level yeah so we're we're heavily engaged with customers on 800 volt solutions and the challenge is very similar

to the challenge we currently have with with 48 or 50 volt solution it's all about power density efficiency reliability and so it's just you know it's the next step for us um generally speaking and every time an architecture changes, it's good for advanced energy because we're a technology leader. We can bring technologies to bear to maximize the efficiency, power density without sacrificing our life. And so that's our value proposition. The way we've approached 800 volts is through a modular approach to our products. So we have different modules we've designed. Then we can combine these modules and different ways to meet the needs of different customers. And that's working pretty well for us, actually. So it's a mix-and-match strategy because the expectations and standards are pretty dynamic. But at the end of the day, we don't expect Interval to be significant from a revenue standpoint until 2028 at the earliest. So we think 2027 is a design win here for us, in 2029 start to see revenue on an interval product and any early thoughts on your content yeah we look at the content and we think the content goes up like it has in every other generation because the power is going up the challenge is getting larger from a technology standpoint and so we think we're in pretty good shape to grow overall content and maintain or improve our gross margins.

That means content per rack?

Yeah, it'd be content per rack where we participate. I think it's important in data center to remember that our strategy is not to grow market share necessarily.

It's to operate those applications that will drive higher margins for the company. and something that investors are trying to figure out is when you know acdc moves from from the wreck to you know set car or a power wreck people are trying to figure out if you guys have the solution for that and you guys are expecting or already engaging with customers on that and expecting yeah so we do have solutions and we're engaging with customers on a sidecar as well as more conventional architectures.

So I think that's one of the advantages of a modular strategy. It gives us a lot of flexibility on how we deal with changing customer requirements. So I think we're in pretty good shape no matter which architecture a customer chooses.

And what would be the biggest content opportunities for you guys in this kind of transition? What needs to happen in order for AE to grow your content? And like you said, grow your content meaningfully in this one.

Yeah, you know, I think the two key parts of this market are one, during the design phase. So it's having the right engineering team in place, having the right IP blocks in place so you can move quickly. And the second is your ability to scale manufacturing quickly and reliably. And I think we've got a really good engineering team. and you know we need to add to that team but it's difficult to find really good engineers so that's the constraint it's not our uh willingness to spend money on more engineers just our ability to find them but we are expanding um as far as new factory space you know i think we've done an excellent job uh in the philippines and in mexico expanding capacity to meet the hyperscaler requirements we've also done a great job upscaling our development sites because it costs more and more to develop these products with the higher power requirements but looking to the future we have this large factory in thailand 500 000 square foot factory and that will be the future for um you know next wave of expansion data center and just to double click into the talk about the kind of bottleneck will be the engineering innovations.

So what are the most difficult things to do there? Is that efficiency, power density, like thermal measurement, reliability, or is it really all of them?

It's all of the above. So that's the key. How can you do this? How can you juggle these different requirements and come out with a solution that's manufacturable, reliable, and scalable? And that's what we've been doing for the past few years. So we built a fair amount of confidence with our customers that we can get the job done. And one of the things we try to do from generation to generation is reuse as much as possible, so that we're not inventing something new every year, or at least we limit the invention. So, you know, I think that's the key is focus on a subset of customers and execute 100% on their needs.

Got it. And in the longer term, there is also like the 800-volt directives to step down to 12-volt rather than using an intermediate 48 and 50-volt bus. So does that increase or decrease AE's content opportunity? And on the one hand side, it's just one big step down. And the other handset is, you know, it's a big step down. So it's like, yeah.

Yeah, yeah. And I think it depends on which customer you talk to, what they want to do. And that also drove our decision to go to a modular approach with 800 volts. So the way to think about this is we have what we call a PDU, a power distribution unit. Now, think of it as a motherboard, essentially, where we can plug in these different 800 volt modules. And, you know, you can do whatever you want with it. internet volts to six volts or to some other intermediate voltage so it's up to the customer how they want to how they want to deploy this pdu and so that flexibility is really important at this stage of the game because i don't think anybody knows exactly how the architecture is going to look a year or two from now but if you have flexible modules you're able to experiment and figure out what makes most sense for you that's your strength like organization yes and So we're all about customization.

I'll take a pause here to see if there's any questions. Let's move on to industrial and medical. So I think it finally looks on the way to some recovery and some growth there. How do you see the rest of the year shake up and then look forward to next year?

Yeah, the industrial medical market has recovered. you know there's significant increases going on i think we were up 11 percent quarter on quarter 16 year on year i think you do and as we look forward we see each quarter getting stronger 27 and um you know we're seeing anything ai related let's say physical ai is driving um a lot of the high-end industrial medical business and we operate in the high end of that business So it's factory automation, robotics, test apparatus, those types of applications. And that part of the market is definitely strong. And we're basically reaping the benefits of our design wins over the past two to three years, just from medical. A lot of those are starting to ramp the volume. And so we're basically expanding capacity rapidly in the Philippines and in Mexico, where most of these products were built.

And I think it was in Q1 you had to make, for lack of a better word, sacrifications to the industrial medical because other parts are ramping a lot faster. Our demands come in, like, got pulled in a lot faster. So at this stage right now, do you have, like, enough capacity to support, like, the ramp across your sector?

Yeah, yeah. So we had a hiccup in Q1. It was really our own problem. We had an execution problem in the company, which we've rectified. But we have enough capacity in industrial medical. We've basically been corrected for execution problems. I think we'll be caught up with our delinquent backlog by the end of this year in industrial medical. But there are no limits right now as far as what we can invest in industrial medical capacity. And I feel like this telecom and networking was never really asked. a lot so uh how strategic is this uh tnn segment market to your long-term target you know we're starting to see more opportunities that are ai related telecom networking so i say that definitely works into our strategy but as a market it's uh i wouldn't say a strategic it's more opportunistic for us so where we can reuse our existing technology to satisfy the needs of telecom and networking customers we will but we're not going to develop you know ground up products for that segment.

And what kind of AI opportunities are you getting? Maybe just overall, what do you provide there?

It's basically the same, very similar products to what we provide to the data center customers. And so you see a convergence there with different companies that need the same basic thing, which is reliable power, highly efficient power, high power density operating.

And some questions for Paul, maybe. On the capacity side, maybe can you explain your capacity expansion strategies? You talk about like talent or expanding a lot of capacity right now, and your customers are also aggressively adding products capacity as well, and we heard a lot of doubles over the past couple of days during our conference. So will you be able to keep up with demand if, you know, they grow more than, the demand grows more than expected? And on the other hand, do you have any concerns for putting too much investment in capacities?

Yeah, that's a good question. We've clearly biased ourselves to make sure we have enough capacity, both in terms of physical capacity and in materials to capture upside. I think we've said that for a while. We do see a ramp going on both data center and the semiconductor market, and we're committed to make sure we can capture those opportunities. That means we've carried more inventory and we're investing quite a lot more in capital expenditures. The good news is we started this a while ago. We saw this trend coming and we were able to get in front of it. As Steve mentioned, we started our Thailand facility build out back in 2023. So that factory is now coming on stream right when we need it with an ability to scale it up very quickly. Today we have, you know, over $3 billion of capacity in our existing facilities with the opportunity to potentially expand that more adjacent space through how we configure things, what we put in those manufacturing line. But with Thailand coming on, that would give us over $5 billion of capacity as soon as 2028. So we feel like we're in good shape from that perspective. You know, in terms of what's the risk of like over-investing, I think there's a few things to think about. First of all, the payback on this investment is very fast. Secondly, a lot of these investments are very fungible. Because we're in multiple markets and we're basically doing final assembly and test, we can move this equipment around depending on what's the actual need at the time. And the third thing is our investments, while they're significant for us, we're not building a fab or a back-end testing ability or something like that. And so the relative capital investment is fairly small. So all in, we believe that these investments are already built into our business model. In fact, if anything, all we've done is we pulled forward investments that were already in our 2030 model because, frankly, the demand is running ahead of what we expected.

And with that $5 billion capacity with Talon Rampov, I think maybe a quarter ago or four months ago, the number was kind of $3.5 to $4 billion. So what drove that upset? Where does it come from?

I think it comes from a number of things. I think, first of all, we've sharpened our pencil a bit. I think capacity is never one number. It's sort of a range. I think we've tried to look at that more on that context. But part of it's accelerating investments. We've increased our capital expenditures to capture, make sure we've got equipment and space needed to meet the growth ramp.

And while Thailand ramping, is there a period where we think about there's kind of underutilization cost? And ultimately, I believe the Thailand facility is margin credit.

Yeah, it's a good question. The investment in Thailand and the other investments in capacity, we're always in our 2030 business level. So it's not new or it's not incremental. What's happened is we pulled that in because we're much further ahead. you know, we're almost getting to the revenue levels in 2027 that we had in our model we put out just years ago, which was a 2030 target. So we pulled that in. So it's contemplated in the model. And in fact, this last quarter, we said we expect gross margins to exit this current year around 42% and next year around 43%. That also contemplates the investment and bringing Thailand and the other manufacturing investments on stream.

Yeah. And just on the gross margin, talk about you are very close to your target model right now but gross margin is just a bit below i think there is terrorist impact in it there is the like ramping cost you talk about but is there anything else that um if you think about that is impact kind of impacting the gross margin not reaching the target you hit the big ones right obviously tariffs were not in embedded in our original model so that's that's a headwind also i think the mix of being more data center heavy is a little bit of a headwind but frankly margins are improving across all of our markets.

And so we wouldn't be able to continue to improve margins if data center margins weren't also improved. And so when we look forward, I think the important thing is, yeah, we're approaching our model from a revenue perspective. We're also approaching it from a gross margin perspective. And we believe that the underlying factors that are improving gross margin can continue. We still expect the majority of the benefit from a mix of new products is ahead of So that's a positive. When you ramp this quickly, it's not always as efficient as you'd like it to be to your last question. So there's still opportunity to wring out some efficiency in manufacturing. And we should continue to reap the benefits of volume. So while we put out a model that said 43.5%, we think we can certainly go beyond that as the business continues to grow, and our new products actually become a bigger proportion of the total revenue.

And just to that point, And your analyst day was, like, 24?

Yeah, just two years ago. Not even two years.

And are you expecting to update your target model anytime soon?

It's a good question. Ultimately, we will do an update to it. But I think the beauty of the model is when we put it in place, it's a scalable model, which says that there's an opportunity to actually continue beyond kind of what would be the bookends of that model. Clearly, you know, revenue is tracking ahead. Data center has been much stronger than expected. SEMI is in a fast ramp. And INM is, you know, finally recovering. So I think those things bode well for continued growth. We think the elements of gross margin outside of tariffs and a little bit of mix are structurally intact, which can also go beyond the 43.5%. And frankly, we're quite a bit ahead on operating leverage because we've grown faster. So, we think, while we haven't updated the model yet, the underlying tenets of the model still hold.

And just, you know, you're doing so well in semis and data center, and industrial medical is recovering. But when you think about investment across these segments, how do you balance this kind of making investment in semis, in data center, or doing some M&As in industrial medical?

Yeah, so the way we think about it is we've really doubled down our investments on semiconductor and data. Those are largely internal investments. We're invested significantly in inventory to put ourselves in a position to capture upside and be ahead of the ramp. We're investing in CapEx. We're spending roughly 2x the CapEx we would normally spend. And so while that's running high today, as we get through these ramps, that can move back to a more normalized level of 3% to 4%, but we're certainly making those investments today. We think from a capital allocation perspective, you know, M&A certainly is an important part of our strategy. We think that that's most tuned to the industrial and medical market, where it's a much broader based set of customers and set of competitors. And it's a way to use M&A as a way to build a bigger beachhead in that market. Because ultimately, we'd like to have three very strong markets that we address going forward.

And just to wrap up, is there anything that you think investors are not understanding advanced energy story very well or anything that we did important that we didn't really touch?

Yeah, I think the key thing is that we have multiple legs of growth. You know, if you look at our customers and the market dynamics, that growth is projected to continue. It may not always be linear every quarter, but it's projected to continue over the next couple of years. And we're tied right into those leading edge technology that support it. Thank you very much.

We are out of time. So thank you very much for coming. And thanks, Steve and Paul, for joining us today.

Thanks, Elizabeth.

Thanks, everyone.