Paul Oldham: Yeah. So good questions on the gross margin the first thing I’d say is we’re pretty pleased that we were able to defend the gross margins of 35% on down revenue. And I think that’s a function of we had we had good mix, but we’re also starting to see some of the benefit of some of our manufacturing costs actions. And we think that will be in the same range in Q2 as we see revenues come back to roughly the $350 million and the mix shifts back to where it was before. But as we look towards the end of the year, the big thing I think that’s changing on is first we are starting to see the benefit of more of our manufacturing consolidation activity. It’s a transition. We’re moving products from one site to another, which means we have to build up on the second site before we can take products out of the first site.
And so we start to see the benefits of that really come in towards the latter part of this year. That’s worth just I say on a general basis 100 basis points of the improvement. You’re right getting higher volume probably is another 100 basis points of that. And our model as we mentioned last quarter is that that comes in at about $400 million of revenue. So we said, we think we’re on track to the same projections we had last quarter, which means generally we see that 400 million within range by the end of the year. The last piece is the material costs and a lot of the benefit that we’ve seen has already come through. As you recall, if you go back four or five quarters that was running 300 basis points of bad news to gross margin that’s been trending down is down into the 50 basis points or so.
And we expect that to largely wash through in the next quarter. So I think the material cost in terms of the premiums is largely getting back into a normal range. We always have some fits and starts with the piece part here or there. So I think that’s getting largely back to normal. Now it’s coming down to our manufacturing cost improvements, recovery in volumes and then over a longer period of time, our portfolio improvements our new products Steve talked about, design wins we’re seeing both in industrial and medical and in semi with our eVoS and eVerest all those should contribute to better margins. I also make one other comment and that is as we see the data center market recovering as Steve mentioned that’s driven by a lot of the AI investment that really demands the capabilities that we’ve been focused on.
As you recall we’ve had a more selective strategy there to focus where customer’s value are differentiation and are willing to pay for that. So while margins in that part of the market you know aren’t as strong as the others they’re much better than they used to be because of where we focused. And so I think that’s also helping us as we go forward as well.
Krish Sankar: Thank you very much, Paul. That’s very helpful. Thank you.
Paul Oldham: You bet
Operator: And the next question comes from the line of James Ricchiuti with Needham & Co. Please proceed with your question.
James Ricchiuti: Thanks. Good afternoon. Hey Paul. as we look out to the second half and see more of these markets beginning to recover a question about OpEx. You mean what kind of OpEx will be required to support the higher revenues? Do you see a need? It sounds like your you guys are increasing R&D spend but just in general as we think about OpEx and the markets recovering?
Paul Oldham: Yes, I think a good way to think about that Jim is that, we guided to $1 million to $2 million higher in Q2. I think based as volumes pick up, we’ll see some a little bit of variable costs continue to accelerate our efforts on getting these new products qualified. So, probably reasonable to think about a similar increase in each of the next couple of quarters. Now, I think that’s lower than maybe we talked about earlier because we’ve taken some near-term actions to help mitigate the growth of spending as we get all these new products and everything else out into the market. So, that’s probably the way to think about a similar increase in Q3 and Q4 relative to kind of the guidance we gave in Q2.
James Ricchiuti: Got it. Hey Steve I wanted to go back to some of the commentary you provided on design wins in industrial and medical markets. Can you talk a little bit about whether you may want to split the two starting with Medical first or a design win activity that you’re seeing coming, I presume, it from mainly from existing customers? Is that fair to say?
Steve Kelley: Yes, Jim — I’ll start with medical. And I think you’re correct when we purchased SL Power a couple of years ago, they had a set of medical customers that complemented our set of medical customers. So, what we’ve been doing for the past two years is cross-pollinating the products between these two sets of customers. And I think medical is got a relatively well defined set of big customers and then a lot of smaller offices go to distribution. So, yes, most of the big design wins are coming through established customers either SL Power brought to Advanced Energy or Advanced Energy brought to SL Power.
James Ricchiuti: At industrial–
Steve Kelley: Yes. So, industrial is a little bit different right because it’s a very, very broad set of customers. So, what we’ve done there. We’ve done a number of things differently over the past let’s say year, year and a half, the first is we dedicated roughly half our sales force around the world to selling only industrial medical products to industrial medical customers. So, this has really been a big factor behind the increase in the design win funnel. The second is we developed a new website which makes it much easier for customers to specify the right product for Advanced Energy and to receive products very quickly from us. So, I think we’re a much friendlier company to do business with fewer industrial medical customer.
The third thing we’ve done is we’ve increased the size of our quick-turn engineering team. What this team does is they take our standard products and based on customer request, they will customize or tailor those products to the specific application. And so we’ve seen roughly a 50% increase in those spin-offs from standard products and we could we could do those custom products very quickly typically between four and eight weeks is the development time. And so how this activities leading to a higher market share in industrial medical and a lot of optimism as we look forward about our ability to become much more significant player in industrial medical.
James Ricchiuti: Got it. Helpful color. The last question if I may ask a broader question just on semi. But yes we sit today. Would you say you’re more or less optimistic about the improvement in the second half I see say three months ago?
