Advanced Energy Industries, Inc. (NASDAQ:AEIS) Q1 2024 Earnings Call Transcript May 1, 2024
Advanced Energy Industries, Inc. misses on earnings expectations. Reported EPS is $0.58 EPS, expectations were $0.71. AEIS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Advanced Energy’s First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Edwin Mok, Vice President, Strategic Marketing and Investor Relations. Thank you, Edwin. You may begin.
Edwin Mok: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy first quarter 2024 earnings conference call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. You can find our earnings press release and presentation on our website at ir.advancedenergy.com. Let me remind you that today’s call contains forward-looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management’s estimates as of today, May 1, 2024 and the company assumes no obligation to update them.
Any targets beyond the current quarter presented today should not be interpreted as guidance. On today’s call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excluded from non-GAAP results are stock compensation, amortization, acquisition-related costs, restructuring and impairment charges and unrealized foreign exchange gains or losses. A detailed reconciliation between GAAP and non-GAAP measures can be found in today’s press release. With that let me pass the call to our President and CEO, Steve Kelley.
Steve Kelley: Thanks, Edwin. Good afternoon, everyone and thanks for joining the call. We had a challenging first quarter. Although, semiconductor revenue was stronger than expected, revenue in our other markets was weaker than forecasted. We believe that our revenue shortfall was due largely to pockets of inventory, which developed at OEMs and distributors after supply chain constraints were resolved towards the end of 2023. Although, we expected inventory correction, we underestimated its magnitude. Despite these issues, we were still able to achieve our gross margin target and deliver earnings within our guidance range. Our outlook for the remainder of 2024 is more encouraging. In the second quarter, we expect revenue to rebound sequentially driven mostly by strength in the data center computing market.
We also expect to grow in the second half of the year as semiconductor revenue gradually improves, the industrial medical market begins to normalize and the data center computing market continues to strengthen. Although, we are carefully controlling spending, we continue to invest in R&D. We are moving full speed ahead bringing new products and technologies to our customers. Our design win pipeline has never been stronger and we expect to make meaningful share gains as market conditions improve. On the manufacturing front, we are executing our consolidation plan taking advantage of lower factory loading to speed product transfers and qualifications. We expect these efforts to benefit gross margin beginning in the second half of 2024 as lower manufacturing costs start to flow through our P&L.
We are operating in a dynamic environment this year. So we need to remain nimble able to respond quickly to upside demand. To do that, we are maintaining strategic piece parts inventory as well as appropriate factory staffing levels. In addition, we plan to build some finished goods inventory to take advantage of opened manufacturing capacity. Now I’ll provide some color on each of our markets. First quarter semiconductor revenue was slightly better than expected helped by growth in value-added services. On the design win front, I’m pleased to report that we have secured our first major wins for both the eVoS and eVerest next-generation plasma power products. Over the course of this year, we expect to announce more major design wins which we believe will drive share gains in the coming years.
We have already shipped more than 50 eVos and eVerest systems and customers have requested that we shipped another 150 systems before year end. We are putting a lot of effort into keeping up with the extraordinary level of demand for these new technologies, which enable our customers to operate much more efficiently at leading-edge nodes. The modular architecture of eVerest has dramatically shortened the development cycle time for derivative products. Our engineering teams have become more productive, enabling our customers to accelerate the introduction of next-generation edge and deposition systems. For both eVoS and eVerest, we took a modular approach, leveraging our broad portfolio of high voltage, low power, RF and advanced control technologies to bring best-in-class solutions to our customers.
Advanced energy development teams from around the world work closely together to make these products a reality. Moving to Industrial Medical, where first quarter revenue was impacted by inventory corrections. Design activity in industrial and medical is extremely robust. After three years of dealing with supply chain shortages, our customers are now squarely focused on product innovation and differentiation. Design wins have been broad-based, including major first quarter wins in medical imaging, electrosurgery and warehouse automation. In March, we launched our Evergreen high-power platform, which features best-in-class efficiency and power density. Target applications include aerospace and defense, fast charging stations, industrial lasers and large capital equipment.
Our new industrial medical products are supported by focused sales teams and our new digital platform, which now includes e-commerce capability. In addition, our quick-turn engineering team works closely with customers to modify and customize our standard products to meet specific application needs. Moving on to data center computing, where first quarter revenue was slightly below expectation due to the push-out of a single hyperscale program into the later quarters of the year. We are forecasting a significant rebound in second quarter revenue, driven by increased hyperscale AI investments and our share gains in enterprise AI servers. Telecom and networking revenue decreased sequentially, reduced infrastructure investment and high inventory levels constrained revenue.
We expect these challenging market conditions to persist throughout 2024. Now, let me summarize our outlook. We expect the first quarter to be our revenue trough for the year. In the second quarter, we expect that the surge in data center computing demand will drive sequential revenue growth. As we move into the second half, our outlook remains largely unchanged from our last earnings call. This is based on our expectation that conditions in the semiconductor, industrial and medical markets will gradually improve, driving sequential quarterly growth. Customers are embracing our new technologies and products and designing activity is at an all-time high. We expect that these design wins will drive market share gains in our target markets. Our manufacturing consolidation plan is on track, giving us confidence in our ability to move gross margins above 40% as markets recover.
Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities, which make strategic and financial sense. Looking forward, we believe that the investments we are making in R&D and manufacturing, coupled with potential acquisitions will accelerate our medium and long-term profitable growth. Paul will now provide more detailed financial information.
Paul Oldham: Thank you, Steve, and good afternoon, everyone. First quarter revenue declined 19% quarter-over-quarter, driven by a challenging demand environment in our non-semi markets. Despite the lower volumes, healthy product mix and solid execution allowed us to meet our gross margin target and steps we took to control our operating expenses enabled us to deliver earnings per share of $0.58, which was within our guidance. The market environment in the first quarter was characterized by higher than expected customer inventory destocking and reduced demand at telecom and networking customers. Semiconductor revenue in Q1 was ahead of our expectations. Backlog declined modestly from the end of last year and was in line with our target of slightly more than a quarter of revenue.
At the same time, this was the second consecutive quarter of higher bookings, which supports our Q2 outlook for a sequential revenue rebound. Based on some early signs of improvement, we believe our Q1 revenue will be the trough and expect business levels to increase over the remainder of the year. Now let’s review our financial results in more detail. Revenue in the semiconductor market was $180 million, down 6% sequentially and 7% year over year. Results were slightly better than our guidance with sequential growth in services. We continue to expect Q2 revenues around this level, but the second half stronger than the first half. Revenue in the industrial and medical market was $83 million, down 23% from last quarter and 32% from last year.
The impact of shorter lead times and increased inventory throughout the channel resulted in higher than expected levels of inventory rebalancing at both our OEMs and distributors. We expect revenues to remain around this level until inventories begin to normalize in the second half. Data center computing revenue was $42 million, down 33% sequentially and 30% year-over-year. Although we had expected lower revenue this quarter, we also saw a single hyperscale program push out into the remainder of the year. However, based on recent order rates, driven by increased investments in AI across multiple programs, we expect revenues to meaningfully rebound starting in the second quarter. Telecom and networking revenue declined 48% sequentially and over 50% year-over-year to $22 million, following a very strong 2023, in which customers replenished inventories following the supply chain crisis.
However, demand in Q1 was even lower than our expectations due to further weakening in both the telecom and networking markets, increasing the impact of inventory destocking. We expect these market conditions to persist through the end of the year. First quarter gross margin was 35.1%, down 60 basis points from last quarter and 170 basis points from last year. Results were in line with our expectations, despite the lower volume due to favorable product mix and actions we are taking to lower costs. We expect Q2 gross margins to be at a similar level on higher volumes but less favorable mix. In the second half, we continued to expect gross margins to increase, driven by our ongoing manufacturing consolidation activities, higher volumes and reduced material costs.
Operating expenses were $93.5 million, down from last quarter and below our target. Q1 was the fifth consecutive quarter that we reduced operating spending, which is down more than 7% from Q4 of 2022 despite the inflationary environment. We will continue to focus on controlling our discretionary spending while investing to support new product and platform activities throughout the year. Operating income was $21 million for the quarter, depreciation was $10 million and our adjusted EBITDA was $31 million. Other income was $5 million at the high end of our guidance with interest income higher than interest expense consistent with Q4. We expect other income to remain around $5 million per quarter until the swap instrument against our outstanding term loan expires in September of this year.
For Q1, our non-GAAP tax rate was 17.7%, higher than our target of 16% due to timing and geographic mix of profits. We expect the tax rate to remain in the 17% to 18% range for the balance of the year. First quarter EPS was $0.58 per share compared to $1.24 in both the previous and year-ago quarters. Turning now to the balance sheet. Total cash and investments at the end of the first quarter was $1.02 billion with net cash of $106 million. Cash flow from continuing operations was $8 million. Timing of previous year incentive payments, higher inventory on strategic investments and lower revenue impacted our cash flow. Overall, inventory increased $25 million or 7.5% sequentially resulting in inventory days of 153 in Q1. DPO increased from 49 days in Q4 to 58 days in Q1, receivables declined by $35 million on lower revenue and DSO was up slightly to 68 days.
During the first quarter, we invested $16.6 million in CapEx. We continued to expect that 2024 CapEx will be approximately 4% of sales. We also made debt principal payments of $5 million and paid $3.8 million in dividends. Turning now to our guidance, we expect second quarter revenue to rebound from a Q1 trough, driven primarily by a recovery in data center computing. We expect semiconductor revenues to be at similar levels to the first quarter and we expect industrial and medical and telecom and networking markets to be approximately flat as customers continue to rebalance their inventories. As a result, we are forecasting our second quarter revenue to be approximately $350 million plus or minus 20 million. We expect gross margin in Q2 to remain at around Q1 levels.
On higher volumes and improved costs offset by less favorable mix. We expect Q2 operating expenses to increase $1 million to $2 million sequentially, due primarily to increased R&D investments to support new product launches and investments to scale the company. As a result, we expect Q2 non-GAAP earnings per share to be $0.73 plus or minus $0.25. Before opening it up for Q&A, I want to highlight a few important points. Overall, we continue to invest and set priorities with the long-term view of the market while managing prudently given near-term dynamics. Despite the lower results in Q1, we expect revenues to improve sequentially in Q2. In addition, we expect the second half to grow largely as we had previously projected, driven by incremental revenue across several programs and timing of market improvement.
Looking beyond this year, we believe we are focused on the right markets, with strong customer pull for our highly differentiated products and technologies. As a result, we expect to deliver strong growth and market share gains as markets recover. Second, we believe earnings for the year will continue to be largely in line with our previous projections, we are executing our plan to improve our gross margins and profitability. We continue to expect gross margins to expand in the second half of the year reaching our target of 37.5% to 38% by the end of the year as revenue improves. In addition, we expect operating expenses to grow modestly over the next several quarters as we manage our cost structure while investing in new products and scale to drive future growth.
Beyond this year, we believe we are on track to achieve our gross margin goal of over 40%, as quarterly revenue recovers to the mid 400 million range and deliver higher earnings than our prior peak as markets recover. Finally, we have a strong balance sheet and are well-positioned to execute acquisitions that make financial and strategic sense. With that we’ll take your questions. Operator?
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Q&A Session
[company-follow-ee line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.
Steve Barger: Thanks. The comment about design activity being at an all-time high. Are you measuring that by starts or by dollar amount of activity or some other metric? And can you quantify where design is in is on a year over year basis?
Steve Kelley : Yes, we will be happy to give you some figures of merit. When we look at 2023, our design win funnel the dollar value in the funnel increased 50% just for the industrial medical part of our business. And as I look to our semiconductor part of the business our metrics our more focused on major design wins, and I talked in the opening about the progress we’re making with our egos and Everest platforms the fact that we shipped 50 those platforms already and have demand for another 150 of those platforms before the end of this year is very significant. It means that our customers have looked at the initial units that we shipped to them and they want more. And so what we’re seeing is that these units are going into not just our customers’ laboratories but also into end user wafer fabs.
And so there’s a race right now to be included as the process or the tool of record for the next super node, which is 2-nanometer and also to be included in the most advanced memory processes whether it’s DRAM or NAND. So I think we’re really good shape there and we’ll see that market share increase in semiconductor based on our major design wins that we’re currently working on this year?
Steve Barger: Yes. That is super encouraging. Are you ready for high-volume manufacturing for eVoS and eVerest if it came to that?
Steve Kelley : Yes. It’s a great question. So we will have two manufacturing sites for eVoS and eVerest. The one we have today is in Malaysia and Penang and we’re also in the process of building a second factory in Thailand. I mentioned in previous calls that will come online in the third quarter of next year. And the first products we’re introducing there will be plasma power products that will be both eVoS and eVerest and some of our high running products. So I think we’re in good shape. We have two very solid manufacturing sites for eVoS and eVerest. And I think the ramp could be more pronounced than the normal given the strong demand we’ve seen this year.
Steve Barger: Got it. And then for my follow up or maybe really my second follow-up. I know it’s hard to model a trough and I don’t want to parse your words too closely, but when you predicted 2Q revenue rebound, I noticed the low end of the guide is not far from 1Q, which I would just call more flat. Can you talk confidence in the rebound and whether you’re leaning towards low middle or high based on what you can see today?
Steve Kelley : Well, I would say, once burned twice shy. So I think our guidance for Q2 is relatively conservative. What we’ve seen basically in the data center side is a surge in orders. So we’re basically working as hard as we can to fill those orders this quarter. So I think that’s very secure. And for the rest of the business, we’re basically modeling flat, which is pretty low to begin with.
Steve Barger: Understood. Thanks.
Steve Kelley : Sure.
Operator: And the next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.
Krish Sankar : Yes hi. Thanks for taking my question. Steve, I had a question on your semi revenues have been kind of bouncing around the $180 million plus or minus $10 million to $15 million range for like almost five quarters now. I understand you went through a cyclical downturn. And your customers were destocking. The real question is I’m just trying to wonder like I understand the mechanical rebound but is really the true drivers for semi revenue is going to come the NAND the CapEx stuff flowing through? Or do you think there are other vectors within that that can help you drive semi revenues better than kind of this range we’ve been in?
Steve Kelley : Yes, Krish, I think one of the bigger drivers over the past year has been trailing-edge logic, right? I think that’s been a big part of the TAM in semiconductor equipment. So we’ve been fortunate to be a part of that. Obviously, the NAND demand has been low for the last 18 months and DRAM we’ve also been suffering there. So I think what we see moving forward, Krish, is in the second half we’re expecting to see some mild recovery begin for DRAM manufacturing and also for leading-edge logic. And then we expect things to accelerate in 2025 as the net incomes comes back online. So that’s a that’s our current outlook on the products we’ve been producing for years then we layer on top of that the demand for eVoS and eVerest for the leading-edge memory and logic processes. So we think 2025 is going to be a real good year for us.
Krish Sankar: That is just my follow-up. I had one more question for Paul. After that when do you expect to see a lagging edge semi to rebound?
Steve Kelley: Okay. I’ll go and take that question. It’s very difficult to say I think the way we think about lagging edge, there’s China and non-China lagging edge. And I think for non-China lagging edge things have been in a trough for a while. It’s difficult to predict when that’s going to come back. So we’re in a wait and see mode. I think it’s similar in China. The China demand based on what we’ve seen from our customers is still reasonably strong and we’ll have to see how that develops in the coming quarters.
Krish Sankar: Got it. And then an quick follow-up for Paul. It’s kind of from the question; the gross margin has been stuck in this range in the 35 plus or minus. You’re talking about getting like now 250, 300 hundred basis points higher exiting this year. And in the past you spoke about premium pricing that as a headwind is going to become a tailwind. But, obviously, volumes fell through is some gross margin rebound predominantly volume-driven and manufacturing costs shutting down factories? Or did you ever see any of the premium pricing being captured? And also do you expect calendar 2024 exit rates for revenues to be $400 million a quarter?
