Advanced Energy Industries Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2025

There are 11 speakers on the call.

Operator

Good afternoon, everyone. In the first quarter financial results with both revenue and earnings approaching the high end of our guidance. Revenue increased 24% year over year, led by strength in data center computing and semiconductor. Industrial Medical revenue declined in the first quarter, but we do expect to deliver sequential revenue growth in the second quarter. Across our markets, we continue to see solid traction with our new products.

Operator

Multiple design wins are going into production this year, driving revenue growth and share gain. We are focused on delivering value to our customers through superior technology, in house manufacturing, and best in class service. To support these objectives, we continue to invest heavily in r and d, new product capabilities, factory consolidation, and our digital platform. In addition, investments in modular design have reduced our development cycle times, enabling the rapid delivery of customized solutions to our customers. Our improvements in operational efficiency drove better than expected gross margin in the first quarter.

Operator

And the closure of our last China factory later this quarter, the culmination of a multiyear effort, is expected to drive further gross margin improvement in the second half. Now I'd like to say a few words about the current environment and how we are dealing with the new tariff regime. So far, we have seen no downward revisions in the demand forecast of our major customers in response to the new tariffs. As a result, our revenue outlook remains solid for the second quarter. Although macro visibility in the second half is limited, current customer forecasts support growth for the year, particularly in data center and semiconductor.

Operator

Although we will not be able to fully mitigate the the direct impact of tariffs, we believe that we are relatively well positioned. As I mentioned previously, our last China factory will close in June. In addition, our shipments from The US into China are low. Therefore, our direct exposure to the highest tariff rates is limited. Further, with major facilities in Malaysia, The Philippines, and Mexico, our broad manufacturing footprint allows us to optimize production to meet customer needs.

Operator

Finally, most of the products we import from Mexico into The US are USMCA compliant, which under current rules means that they are exempt from reciprocal tariffs. Now let me provide updates on each of our markets. In the first quarter, semiconductor revenue decreased slightly from Q4, but was well ahead of plan. The better than expected results were due largely to strength at the leading edge for both logic and memory processes. We expect semiconductor demand to remain solid in the current quarter, supported by continuing investment at the leading edge.

Operator

We continue to see strong customer pull for our next generation EVOS, Everest, and NavX products, and have cumulatively shipped over three fifty qualification units through the first quarter. This represents a fivefold increase from a year ago and a meaningful jump from more than 250 units shipped just a quarter ago. Our customers are incorporating these products into their next generation platforms for both logic and memory processes. We expect initial production ramps to start in the second half of this year, followed by more significant growth in 2026. In data center computing, we achieved record revenue, which more than doubled year on year.

Operator

Multiple hyperscale design wins are ramping to volume in 2025. We expect data center revenue to grow in the second quarter and into the second half of the year. Our new products, which feature high reliability, high efficiency, and high power density, are a good fit for power hungry AI data centers. Our focus on high end opportunities has yielded deeper partnerships and closer relationships with our key customers. In addition to the products we are currently ramping to production, we have already won key slots in next generation racks with expected ramps in late twenty twenty five and early twenty twenty six.

Operator

Industrial medical revenue decreased sequentially more than we expected. Continuing inventory digestion, coupled with weaker turns orders, were the primary headwinds we faced in Q1. However, late in the quarter, we saw a meaningful increase in distribution orders, which should drive sequential growth in the second quarter. We believe that industrial and medical revenue likely reached a bottom in Q1. However, the pace of recovery in this market could be impacted by the new tariff regime.

Operator

On the new product front, we continue to grow our design win pipeline. In the first quarter, we recorded major wins in industrial coating, robotics, therapeutic, and life science applications. On past earnings calls, I've talked about the success of our new customer friendly website. In addition, we've been working closely with our key distributors to expand our presence on their websites. Mouser Electronics, the first distributor to launch their enhanced AE microsite, reported a 60% increase in page views in the first quarter.

Operator

We expect similar results when our other distributors launched their AE microsites later this year. These enhancements make it easier for engineers to quickly identify the right advanced energy product and find available inventory. In the telecom and networking market, we experienced a modest sequential revenue decline in the first quarter, as anticipated. Going forward, we expect revenue in this market to remain within our target range. Now for some closing thoughts.

Operator

First, we are off to a good start in 2025, thanks to strength in the data center and semiconductor markets, the success of our new products, and continued improvements in operational efficiency. For the remainder of the year, we will focus on maintaining our new product momentum, staying close to our customers and completing our factory consolidation plan. Second, based on our understanding of the current tariff environment, we believe that we are relatively well positioned and are taking the right actions to minimize our exposure. Third, demand for our new products is very strong. Our R and D investments are paying off as customers incorporate our new technology into their leading edge products.

Operator

Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities, which make strategic and financial sense. To summarize, our results and guidance show that Advanced Energy is executing well in a dynamic market environment. We are confident that we can grow revenue, gain market share, and improve our margins in 2025. Paul will now provide more detailed financial information.

Speaker 1

Thank you, Steve, and good afternoon, everyone. Let me start with the headlines. First, we executed well in a dynamic environment. First quarter revenue of $405,000,000 was ahead of our guidance with strength in data center computing and semiconductor more than offsetting weakness in industrial and medical. Gross margin of 37.9% was better than expected, and we managed spending to the low end of our projection.

Speaker 1

As a result, earnings per share was a dollar 23, well above our guidance. Second, looking into q two, with near term demand visibility in data center and semiconductor and the ramp of new products, we expect revenue and earnings to grow sequentially and to be above our previous expectations. Finally, in April, we took advantage of market volatility and repurchased $22,700,000 worth of common stock at an average price of $83.78 per share. Now let's review our first quarter financial results in more detail. Total revenue of $405,000,000 decreased 3% sequentially, but increased 24% year over year.

Speaker 1

Semiconductor revenue was $222,000,000, down 2% from q four, but up 23% from last year. Strong demand in AI related leading edge foundry logic and memory drove the better than expected results. Data center computing revenue was a record $96,000,000, up 9% sequentially and a 30% year over year. Multiple new hyperscale programs started to ramp this quarter and are expected to drive further growth in q two. Revenue in the industrial and medical market was $64,000,000 down 16% from q four and twenty three percent from last year due to ongoing channel inventory destocking and lower turns revenue.

Speaker 1

However, orders rebounded during the quarter. Telecom and networking revenue declined 5% sequentially and 2% year over year to $22,000,000, in line with our expectations. First quarter gross margin was 37.9%, down just 10 basis points from last quarter, but up two eighty basis points from last year. Gross margin was above our previous guidance even with the initial impact of tariffs that started in March, driven by favorable product mix and improved manufacturing costs. Operating expenses of $98,600,000 were down more than $3,000,000 from last quarter and at the low end of our target range.

Speaker 1

OpEx increased only modestly year over year, while revenue increased 24%, well ahead of our target of growing OpEx at half of revenue growth. As a result, first quarter operating income was $55,000,000 and operating margin was 13.5%, up almost 700 basis points year over year. Depreciation was $11,000,000, and our adjusted EBITDA was 65,000,000, which more than doubled year over year. Other income of $1,000,000 was lower sequentially, mainly due to the impact of investment returns on deferred compensation. For q one, our non GAAP tax rate was 15.8%, below our target mainly due to delayed implementation of the pillar two global minimum tax regime in certain jurisdictions.

Speaker 1

We continue to expect the tax rate to increase to approximately 19% for the balance of 2025 based on full adoption of the GMT. As a result, first quarter earnings were a dollar 23 per share compared to a dollar 30 per share in the previous quarter and 58¢ per share a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the first quarter was $723,000,000 with net cash of a hundred and $58,000,000. Cash flow from continuing operations was $29,000,000.

Speaker 1

Inventory increased $8,000,000 as we added critical piece part inventories to support near term growth. Inventory days increased from 126 in q four to 132 in q one, and inventory turns were 2.7 times. DPO increased from fifty days in q four to fifty six in q one, and DSO increased from fifty seven days in Q4 to sixty two in Q1. During the first quarter, we invested $13,900,000 or 3.4% of revenue in CapEx. Finally, we paid $3,800,000 in dividends and repurchased $908,000 of common stock at an average price of $94.26 per share.

Speaker 1

Before I talk about guidance, let me give you a little more color on the impact of tariffs and trade on AE. As you know, the situation is very dynamic, potentially increasing macroeconomic risk and making longer term financial projections difficult and subject to change. However, we believe that AE is relatively well positioned. From a revenue perspective, our customers are still projecting continued investments in artificial intelligence and new technologies. In addition, incremental revenue from new products in data center and semiconductor should position us to outgrow our markets and gain share.

Speaker 1

From a cost perspective, while tariff expense will increase near term, we are taking actions to mitigate the financial impact. As Steve noted, we are starting with a favorable geographic manufacturing footprint, giving us the flexibility to optimize production in lower tariff countries and utilize exemptions like USMCA wherever possible. We are working with our supply chain to limit imports from high tariff locations, qualify alternate vendors or parts, and redirect goods flow where it makes sense. Finally, we expect to make price adjustments to cover costs which cannot otherwise be mitigated. As a result, assuming no major change in the current environment, we expect to continue to be able to meet our gross and operating margin targets over time.

Speaker 1

Turning now to our guidance. First, our outlook contemplates our assessment of the direct impact of tariffs. Based on solid customer demand, we expect revenue in the second quarter to grow sequentially and the second half to grow low single digits over the first half. In the data center computing market, we expect continued ramp of new programs for customer AI investments to drive strong sequential growth in the current quarter and potentially beyond. We expect Q2 semiconductor revenue to moderate slightly from Q1.

Speaker 1

Based on the stronger than expected first half, we now project semiconductor to grow around 10% for the year, partially due to initial production ramp of our new products. Within industrial and medical, we believe q one was the bottom and expect revenues to start recovering in q two on increased orders. However, we expect the rate of recovery to be tempered by economic uncertainty and at the cost of tariffs. As a result, we are forecasting our second quarter revenue to be approximately $420,000,000 plus or minus 20,000,000 We expect Q2 gross margin to be around 38% on continued improvement in manufacturing and higher volumes, offset by less favorable mix and the impact of the new tariffs. We expect Q2 operating expenses to increase to 99,000,000 to $101,000,000 due primarily to investments in new products and annual merit increases.

Speaker 1

We expect other income to be approximately $1,000,000 per quarter and the tax rate to be in the 19% range. As a result, we expect q two non GAAP earnings per share to be a dollar 30 plus or minus 25¢. Finally, given our expected market share gains in data center and next generation semiconductor products, we have decided to increase our full year 2025 CapEx guidance to 5% to 6% of revenue. While this is above our prior target of over 4%, our strong balance sheet enables us to make this investment in high volume capacity to capture revenue upside and support new product introduction capability. Before opening it up for questions, I wanna highlight a few points.

Speaker 1

Although the new tariff and trade policies are creating macro uncertainty, particularly in the second half, we believe we are relatively well positioned. We believe we are gaining share across our markets, supported by multiple generations of high end data center solutions, leading edge plasma power platforms, and a broad set of customized industrial and medical design wins. We're on track to complete our China factory closure this quarter, providing margin uplift in the second half. As we demonstrated in q one, we continue to improve our cost structure and are committed to find ways to offset the increased cost of tariffs and achieve our gross margin expansion goals over time. Finally, our strong balance sheet and net cash position enable us to fund investments in capability and capacity for growth, opportunistically repurchase our stock to offset dilution, and maintain ample liquidity to pursue strategic acquisitions that create shareholder value.

Speaker 1

With that, we'll now take your questions. Operator?

Speaker 2

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue.

Speaker 2

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. And the first question comes from the line of Brian Chin with Stifel. Please proceed with your question.

Speaker 3

Hi there. Good afternoon. Good work, and thanks for letting us ask a few questions. Maybe firstly and I I apologize if if I missed this, but are you is your underlying view for the semi equipment market for kind of flattish WFE? And if that's the case, reason you've revised that, do you do you how how would you contextualize your 10% growth outlook, you know, level of, of outperformance?

Speaker 3

I guess this would also imply second half semi cap revenue is roughly similar ish to to first half. I guess I'll stop there with that first question.

Operator

Yeah. Thanks for the question, Brian. So as far as WFE goes, we don't we don't try to pick that or predict it, but we think it's somewhere in the, you know, zero to 5% up, this year. So our growth of 10%, which is what we're projecting year on year, is above market. And and we think that's due to a few factors.

Operator

You know? One is the increasing etch and depth intensity of these leading edge processes where we're very strong. Secondly, our new products are catching on. That's contributing to our outperformance. And and third, you know, most of the action is in leading edge logic and and DRAM.

Operator

And those are two areas where we have good content.

Speaker 3

Got it. Got it. Thanks, Steve. And then my my follow-up, one, can you give us a sense of I don't know if it's advanced logic, maybe NAND, where you're starting to see that initial production ramp of the the the new plasma process power products in the second half of the year? And then, you know, is it possible in any way that the kind of bracket the potential of tariffs as when you could see in the back half of the year?

Speaker 3

I I know it's sort of difficult at at this stage, but just if if you have any additional thoughts on that.

Operator

Yeah. So so maybe I think your second your second question was about tariffs and such impact on our business. So why don't I start there? I'll start there. So, when you look at our business, you know, most of what we're selling this year goes to either semi equipment companies or to data center companies.

Operator

And they're all they're all big companies, and and, they're sophisticated, and and they handle the tariff issues themselves, essentially. That's almost 80% of our business in 2025. So for us, in our view, most of the tariff impact will probably fall on the industrial medical, customers. And so most of those products are built in either Mexico or in The Philippines. So in Mexico, little less than half our output goes into The United States.

Operator

And of that output, the vast majority of products are compliant to USMCA, which means there are no reciprocal tariffs. So, actually, our our, you know, our position in Mexico is an advantage for us relative to most of our competitors. As far as The Philippines go, you know, if if the reciprocal tariffs are reimposed, The Philippines Seventeen Percent tariff is less than almost any other company or any other country in Asia. So I think we're pretty well positioned, you know, to limit the impact of tariffs on our business.

Speaker 3

Thanks. That's that's really good color. And then maybe the other part, the the front end of that was just the, what what device end markets where you're seeing, you know, probably contributing to that that big step up in q one, 03/1950, you know, shipments up from two fifty in the prior quarter. Is it is it advanced logic? Is it a NAND flash?

Speaker 3

Or any any color you can provide there.

Operator

It's it's across the board, but clearly, the greatest sense of urgency is in in advanced logic and also in DRAM.

Speaker 3

Okay. Great. Thank you.

Speaker 2

And the next question comes from the line of Scott Graham with Seaport Research. Please proceed with your question.

Speaker 4

Hey. Good afternoon, and well done. Very nice quarter. I have a couple of questions. Certainly, the one is a piggyback onto the prior question is, you're gaining share against WFE in total, but do you think you're also gaining share within the power sleeve of WFE?

Operator

You know, I've always hesitated to talk about market share because it, you know, goes up and down based on a variety of factors. But I think at this point, what I could say is given the traction of our new products, of Everest, of EVOS, of NavX, and the derivatives, I think we're we're poised to gain share in the coming years. And, you know, I'm confident saying that these products allow us to to basically expand our share in conductor etch, which is where we're strongest today, but they're also allowing us to participate in dielectric etch, which is a white space for us today. So I I think I think we'll see significant market share gains in semiconductor over the coming three to five years.

Speaker 4

Okay. Thank you for that. Then just a quick on the I and m, although maybe not so quick, but, you know, that business has been really problematic for you guys now for a number of successive quarters, and, the industrial economy is probably gonna get a little weaker as I think you've pointed out with some caution there. I'm just wondering what are the steps you need to take here? It seems like well, I think we've talked about this before.

Speaker 4

You you really need an acquisition there to gain some critical mass because it seems like you've got a lot of business but in a lot of very small niche type of of markets. I'm just very, very those are types of markets that, you know, can easily destock at any time, and they have been. So what's what is the plan there to start to improve that business? I know your orders were better, but is an acquisition really the the key to getting that business, you know, more plate appearances with customers? Is there something internal you need to do, in I and M to kind of reverse the fortune there?

Operator

Yeah. So, Scott, there's a couple ways I think about I and M. First is the long term, and the second is short term. Right? And I think on the short term, you know, it's been extended correction period, because the I and M customers were really the last customers to recover from the, the supply chain crisis associated with COVID.

Operator

And so I think there's still many customers are still working their way through excess inventories, and that's been complicated by lackluster demand. Right? So so the current state of the market is not great, but we think that we'll be able to to show some improvement, moving forward this year, but it's not gonna be dramatic. But as I think about I and M long term, you know, the same factors, I think, are gonna work in our favor because this is largely a sole source business. We're aiming at the high end of the industrial medical market.

Operator

We're having great success, winning new designs, and, you know, we just set a record as far as our number of products, and opportunities in our pipeline. So I think we're poised to gain meaningful share as the market recovers. And so that's a you know, it's gonna be a process, but I think we have to kinda separate the long term and the short term when we think about industrial medical. Now as it comes to acquisitions, you know, we think, INM is a great place to make acquisitions because it's a highly fragmented market. And, you know, we have a number of interesting competitors, which also have a lot of sole source position.

Operator

And so we continue to, you know, to work hard on our pipeline. And, you know, if we make an acquisition, it's likely to be an I and m.

Speaker 4

Right. Okay. Thanks a lot. Appreciate it.

Operator

Thanks, Scott.

Speaker 2

And the next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Speaker 5

Hi. This is Robert Martin on the line on behalf of Chris. Thank you for taking my questions. Maybe just a quick follow-up. In the industrial and medical markets, March seemed like a little bit weaker than maybe you expected exiting last year.

Speaker 5

And I know that business can be a bit lumpy on a quarterly basis. But looking into the second half of this year, are you seeing any sort of changing in customer purchasing patterns within the market that give you confidence in the second half recovery? Or is it really primarily based on seeing some of the inventory drawn down through your distributor network? Any color there would be helpful.

Operator

Yeah. You know, I think it's it's primarily our view through distribution because in INM, roughly half our sales go through the distributor channel. And so we've seen, you know, four straight quarters of reduction in inventory and distribution, so we're encouraged by that. We're also encouraged by by some increased order activity in the latter part of q one. And, you know, we analyzed that, and we figured out it wasn't due to tariffs.

Operator

It was really due to demand that the the distributors are seeing from end customers. So we think we think their orders are are matching demand right now. And our overall view of, the industrial medical customer base is they're taking a wait and see approach, you know, particularly as these tariffs get rolled out or or not, and and they're proceeding cautiously.

Speaker 5

Okay. That's helpful. And then maybe just a quick follow-up on questions around the semi cap business. Is there any sort of risk given the current macro environment that customers would be able to delay the rollout of some of these new systems that you're predicting to to ramp pretty significantly in the second half, or are those more strategic and sort of set in stone?

Operator

Yeah. You know, I think the challenges our customers are are facing are pretty significant, the technical challenges as we move to two nanometers and below. So there's always gonna be, you know, pushes and pulls of schedules, and and we can't control that. But what I do know is there's a high degree of, urgency on the part of our customers to to incorporate these new solutions from Advanced Energy because, they run into issues, with the older technology. It just doesn't get the job done fast enough.

Operator

And so that's that's the big advantage that we have is our new technology provides our customers throughput and yield performance, which is is as good as or better than the last generation technology.

Speaker 5

Got it. Thank you.

Speaker 2

And the next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Speaker 6

Hi. Thanks. Really great to see the EVOS and Everest performance. And I'm just trying to think about the what high volume production could look like. You know, you said you've shipped 350 units cumulatively through 1Q.

Speaker 6

Maybe that ends up at 500 or 600 or whatever for this year. But does that double as you go into high volume production, or is it more than a double? How how have programs like that worked in the past?

Operator

Yeah. It when it goes into high volume production, it'd be much more than double. So so what we've done is we've seeded the market. So all of the, all the customers we have practically have have, received, and purchased, these qualification units. And so they're they're using these units both in their development labs as well as at end customer wafer fabs.

Operator

And so these are in various stages of qualification. In some cases, the products are already qualified and will start to ramp in second half of this year. But in most cases, the qualification will continue through this year, and the ramps will start next year.

Speaker 4

Right.

Operator

But, yeah, I think you know, think of these units as selling in the tens of thousands of dollars. Our our content is way up, you know, from last generation to this generation because we're delivering more value, and we're also operating at higher power levels. And so as we win these these advanced node positions, you know, it's gonna help increase not just our unit market share, but also our dollar market share.

Speaker 6

Yeah. That that's excellent color. Thanks. Are those strictly for newly built tools, or are there upgrade potential applications?

Operator

Yeah. The work we're doing today is strictly for newly built tools. However, you know, there where some customers are looking at ways they could use some of the technology to upgrade older tools. But that's that's really a second priority today. Most of our customers are really focused on winning those, those new slots in the advanced processes.

Speaker 6

Understood. And then a quick one on data center. You talked about growth in 2Q and then again in the February. I'm just curious about visibility of demand. Does that extend into 2026 with this kind of momentum?

Speaker 6

And is there an upside limit to capacity as you stand today? Or or could you deliver a 25,000,000 a quarter or a 50,000,000 a quarter if demand was there?

Operator

Yeah. So I would say in hyperscale, the inputs we're getting today are up into the right. And our visibility for 2025 is is pretty good. We have orders. We have we have solid forecasts that give us a lot of confidence, not just in q two, but also in the second half growth in hyperscale.

Operator

As far as going to '26, you know, we don't have any, forecast, but what we do have are a lot of new wins. And so right now, the cadence of new products and data center is about, you know, one new one per year. So we're upgrading trying to keep up with the introduction of GPUs, and each new generation of GPUs requires basically higher power. And so this is a very rapid upgrade cycle. And so we're we're ramping ramping to volume on many programs right now, but we also have one designs that will help us ramp in '26.

Operator

You know, the absolute, number, it is hard to say at this point, but, you know, I think, we've done a pretty good job diversifying, across multiple hyperscalers, multiple programs, and and multiple generations of products. So I'm pretty happy with the with the direction of that business. And and what was your second question?

Speaker 1

Yeah. Steve, may maybe I'll just follow-up on the on the capacity. Yeah. You heard you heard in our comments that we're actually increasing our CapEx in the near term. This is to support, really, the capacity around these high power power supplies and the infrastructure that goes behind it.

Speaker 1

So we certainly have capacity to grow from where we are. But based on our visibility of the design wins we have and, you know, kind of the power requirements, we have increased our CapEx in the near term to ensure we're in a bit in a position to capitalize and to take advantage of of what we think is is the higher volumes that are coming. Now I characterize a little bit of this CapEx as a pull in from maybe a couple of years out, and I think it just demonstrates that the market's moving much more quickly to these higher power requirements. And, frankly, our our win rate in terms of capturing, you know, this you know, the the upside upside faster. So there there is some investment we'll be making around power infrastructure and capacity around the the high power requirements for data center.

Speaker 7

That's great. Thanks very much.

Speaker 2

And the next question comes from the line of Mark Miller with Benchmark. Please proceed with your question.

Speaker 8

Congrats on the quarter. Thank you for the question. I'm just wondering, in your backlog, what does the margin profile look like? You're kind of guiding to flat margins but improvements in the second half. Is that based on the backlog?

Speaker 8

And the second question or part of the question is, in terms of the design wins, do these products have above corporate average margins?

Speaker 1

Yes. Good question, Mark. So as you know, our backlog, you know, in a normalized environment isn't that meaningful because so much of it is in is in semi equipment or even equipment that's going to hubs for data center. So our outlook is more based on our projections of what that product mix is going to be as we look forward. And in general, we do expect higher margins from our new products and from this new mix.

Speaker 1

I'll say in data center, which is which is ramping, what we've talked about is that the product margins in those areas have improved. They're not at corporate average yet, but they're closer than they have been historically. And, you know, we focused on more sole source opportunities or limited source opportunities, and we think that's that's really playing to our strengths and paying off for us right now.

Speaker 8

At at one point, you you were talking about maybe by the end of the year that we'd be in a trajectory towards 40% margins. Is that still possible, or is still the visibility is still not there?

Speaker 1

Yeah. We said on our call that despite the tariffs, you know, we're not we're not changing our gross margin goals. So if you remember kind of the elements of that, we talked about three things. One is the factory consolidation improvement related to better cost. That's on track, and we feel good at achieving that.

Speaker 1

We talked about new product mix. That starts to impact the second half, and we we think we're on track with that with that as well. It'll have a bigger impact in '26. And the third one is volume. Certainly, we're seeing, you know, volumes a little higher than we had projected, and I think that's a positive.

Speaker 1

So if we kinda stay on this rate, in generally, what we said before, we would expect to approach 40% as we exit the year. And although we're not guiding to the year, I think if you look at the the pieces behind that, then, you know, we said we're committed to to achieve those, achieve those same goals. The one comment I'd make maybe to your earlier question is, you know, we do see some impact to mix, you know, particular data centers more heavy. But we've also characterized that as kind of in the 50 basis points, you know, plus or minus 50 basis points in a quarter. So, there could be a a little bit of challenge there, but we'll also have higher volume.

Speaker 1

And overall, it's it's not changing our model or our goal to achieve gross margins. Thank you.

Speaker 2

And the next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question.

Speaker 9

Hi. Good afternoon. This is Chris Kringle on for for Jim. With with respect to the plans for the the Thailand facility, have the have the tariffs changed on the on the margin or incrementally any anything with respect to those plans in either the timing or the capacity plan for that site?

Operator

Yeah. I don't think so. You know, we we're still planning to open that sometime in 2026, but it's really tied to increase in demand that that justifies us opening the factory. And, you know, our first products in in Thailand will be plasma power products, and I think the plasma power part of our business is, less sensitive to tariffs, than industrial medical. So, I think things are on track today.

Operator

We'll have the the building and the facilities completed by September of this year, and, we could turn that factory on within six months of saying go. So I think I think we're well positioned in Thailand, and we're ready to go when the demand justifies it.

Speaker 9

Great. And you'd you'd mentioned the success you've seen early success you've seen with the the MicroSite with Mouser. Do you do you see any incremental impact either on sell in or or the amount of inventory held versus, you know, an arrangement where there is no MicroSite as as more of these microsites are added in in the future?

Operator

Yeah. So I think the best benchmark for us is our own website, which we, basically introduced in late twenty three, and and we had a pretty good experience in '24. So in '24, we we basically earned a 60 design wins, right off the website with very little participation from our Salesforce, and, that was quite significant for us. And we expect similar performance this year. But, at the end of the day, the reach of a company like Mouser or some of our other distributors is much larger than than than our our reach.

Operator

And so as we bring up these these microsites, you know, we expect to convert, many of these opportunities into wins, and and we think it's gonna turbocharge our industrial medical business.

Speaker 9

Thanks very much.

Speaker 2

And the next question comes from the line of Daksin Zhang with Bank of America. Please proceed with your question.

Speaker 10

Hi. Good afternoon. Thanks for taking the question. Going back to semis, I know you said you don't see a lot of direct impact from tariffs, but are you seeing any indirect impact? I think a lot of your customers are or or they've expressed pull ins from customers, particularly in China, in anticipation of the tariffs.

Speaker 10

So I'm I'm curious if you're seeing any impact of that. Thank you.

Operator

No. We have not really seen any indirect impacts. The forecast that we operate off of from our from our semiconductor customers really haven't seen any downward revisions. So I think, I think they're finding ways to deal with the tariffs just like they did with the export control regulations. Right?

Operator

Obviously, tariffs and export control don't help our customers to sell into China, but I think they're doing their best to to work within the rules. And so far, we haven't seen any downward revisions in the forecast.

Speaker 10

Got it. And then one follow-up on gross margin as well. So in the near term for the rest of the year, I think the story is pretty clear. You have a lot of tailwinds. But looking into '26, what would be some of the drivers that would lead us to think that there's still a lot of runway beyond the 40% mark?

Speaker 1

Yeah. I think it's a couple of things. One is we should really be getting some traction on the new products and the mix going into '26 and through throughout 2026. As you recall, we said that was two to 300 basis points of opportunity, and we're just sort of scratching the surface of that, you know, as we exit 2025. So I think that's a becomes a more significant driver as time as time goes on.

Speaker 1

I think the second thing is as our markets sort of work their way through, you know, kind of the near term headwinds, certainly volume is is important. And we believe that we will continue to earn a hundred basis points of gross margin improvement for every $50,000,000 of quarterly revenue. So we've seen that over the last year, and we expect to continue to see that as we go forward. Obviously, there's some near term headwinds from from tariffs. It's hard to gauge whether that accelerates or moderates, you know, over the longer term, but we we think we can largely overcome those headwinds by actions we're taking internally both to mitigate the impact as well to to drive margins even better as we focus on, you know, cost, quality, you know, things that are in our control to continue to improve improve margins.

Speaker 10

Understood. And then one last one, if I may. On the OpEx side, in q two, I think you said you're progressing much better than you're going at half the rate of revenue target. But at the same time, I think you also mentioned last quarter that OpEx in general grows at half the rate of revenue. So should we expect the pace to pick up in the second half, or how should we think about the full year OpEx?

Speaker 1

Yeah. The way to think about it is similar to our guide last time. We said that overall, we would expect OpEx to increase one to 2,000,000, incrementally each quarter through 2025. That's a function of, you know, not only, salary changes and and some inflation, but also continued investments in r and d and and some variable costs as revenue grows. So that's that's the way to think about it.

Speaker 1

I think when you you do the math around that, first, I think we're in entering the year in good shape because expenses are up only modestly from a year ago on on significantly better revenue. So we're starting from a good place. But if you just you kinda run the math out, we think we will actually grow spending, you know, better than that 50% of revenue over the course of 2025.

Speaker 10

Got it. Thank you.

Operator

Mhmm.

Speaker 2

And ladies and gentlemen, just as a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment while we pull for additional questions.

Speaker 2

And the next question comes from the line of Rob Mason with Baird. Please proceed with your question.

Speaker 7

Yes. Good evening and nice work on the quarter. Just wanted to circle back to the I and m segment real quick just to make sure I have my arms around, you know, the step down we saw there as as well as maybe how can that can start to recover. Steve, does do you draw any distinction, between the industrial piece and the medical piece just in terms of what you're seeing out of customer activity at this point?

Operator

Yeah. We we do see a bit of difference between the two markets. In medical, we're seeing less enthusiasm from customers. I think there's some uncertainty about the tariffs. There's some uncertainty about federal funding, and, you know, we just see less optimism from medical customers over the past quarter.

Operator

I think industrial is kind of a mixed bag. You know, there's some areas that are strong, like Malero, and for us, industrial coatings, which uses plasma technology. But most of the rest of the markets are are a mixed bag or or down a bit. So, we do distinguish between the two. Obviously, this is an area where, you know, we spend a lot of time, talking to to targets for for our m and a pipeline.

Operator

The issue, for us right now is that there's a continuing evaluation gap between what we think Target's worth and what they think they're worth. And over the past year, we've seen, valuations come down on many of the targets, in our pipeline. So we think, this year, we we could see some of those gaps closing, especially if those businesses remain challenged. So we're, you know, we're continuing to stay in touch with the targets in our funnel, and hopefully something breaks this year.

Speaker 7

I see. Is there is there any dynamic happening in that I and m where, you know, products have end of life and the design wins the next design win that you're on just hasn't ramped yet? Or is this solely a function you know, the step down just solely a function of active, you know, product volumes being lower?

Operator

Yeah. I I think that's a big part of it, actually. You know, our design win pipeline is is at all time high. So I think we're doing very well in the market, but those design wins have not ramped to production for the most part. So people are waiting.

Operator

They're trying to exhaust their current inventory before they launch new products. There's quite a bit of that going on, you know, across our INM customer base.

Speaker 7

I see. Very good. Thank you.

Operator

Thank you.

Speaker 2

And the next question comes from the line of Scott Graham with Seaport Research. Please proceed with your question.

Speaker 4

Yeah. Hi. I thank you for taking the question. Just two follow ups. The first is maybe on tariffs.

Speaker 4

You guys are always very transparent about what's going on, your operating expenses, what have you. Is there anything more you can give us on tariffs in terms of percent of cost of sales that, you know, are affected, and then we could apply the tariffs from there? Could you is it possible you could tell us the impact in the first quarter? We could extrapolate from there, but just maybe a little bit more to go on.

Speaker 1

Yeah. We haven't we haven't broken it out specifically, Scott, frankly, because we don't think it's that big of an impact. As we talked about, we're pretty well positioned. There are some costs for sure, and they're gonna increase in the second quarter. What I can tell you is that we've contemplated that in our guidance.

Speaker 1

And so you can kinda look at our guidance at, you know, I'd say flattish, you know, up slightly from q one with a bigger headwind from tariffs. You know, maybe there's a little more volume there, and and maybe you can kinda get a little bit of a sense from it from that. But, you know, generally, you know, we we haven't broken it out. It's it's sort of one of those things that at this point, it's it's a little hard to call out exactly, but we believe that it's contemplated in our outlook in that as we look over the course of the year, you know, assuming, you know, the current tariff levels, we think that's, you know, manageable within the models that we've talked about from a gross margin perspective.

Speaker 4

Okay. Alright. Understood. And then the the only other question I had is, again, on the I and m business. In the past, you've talked about, you know, the declines in sales, and you've kind of sized what you thought was the approximate destocking impact.

Speaker 4

Could you do that again this quarter, you know, of the decline that we saw this quarter? How much of that would you say was the destocking?

Operator

Well, I I could tell you that as far as the distributor inventories go, we we saw a decline of about 14% in in our overall disti inventories from q four to q one. That might give you some idea. But that's, again, the latest decline. We've seen four straight quarters of decline in distributor inventories, and so we're getting to a point where we're normalizing, I believe. And, yeah, I think we've set the table for some growth in q two and perhaps in the second half in industrial medical.

Speaker 4

Okay. You mean sequential growth?

Operator

Yes. Sequential growth.

Speaker 4

Very good.

Speaker 1

Thank you. Thank you. Yeah. I think one comment we made on the call is that we had did see orders increase quite a rebound late in the quarter. We're encouraged by that, and I think one of the characteristics there is that many of those orders were inside our lead time.

Speaker 1

That suggests to us the customers, they they, like, really need it now. It's not across the board, but there are pockets of that. And so it's it's another data point that suggests that maybe we're getting to that that point where, you we're coming to the end of the destocking. I think the flip side of that is I think the change in tariff, environment, you know, probably affects industrial and medical the most. So all things being equal, we would expect to see things maybe continue to grow from this point.

Speaker 1

It's a little hard to handicap, you know, the environmental impact and how quickly customers will respond, you know, as they look at their demand rates.

Speaker 4

Very helpful. Thanks a lot. Appreciate it.

Operator

Thanks, Scott.

Speaker 2

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

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Earnings Conference Call
Advanced Energy Industries Q1 2025
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