Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the advanced Energy Industries Q4, 2019 earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question.
<unk> session and instructions will follow that sorry, if you require offered assistance during the program. Please press Star then zero when you touched on telephone.
I would now like to get Roasteries carbs called <unk>, Vice President of strategic marketing and Investor Relations you may begin.
Thank you operator, good morning, everyone welcome to advance energy fourth quarter 2019 earnings Conference call.
Today, all you've all walkman, <unk>, President and CEO, Oldham, our executive Vice President CFO.
Brian Smith, <unk> director of Investor Relations.
Yeah, I've not seen our earnings press release, you can find on our website at <unk> Dot and Dan that Josh energy Dot com.
Are you also find a slide presentation to follow along all discussion today.
Before I begin like dimension that events energy will be participating at multiple investor conferences in the coming months. That's already event occurs we will make additional.
Let me remind you got today's call contains forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially and not guarantees of future performance.
Information concerning these risks and uncertainties Islam Ueno findings with FCC. All forward looking statements are based on managements estimates projections and assumptions hassle today February 18, 2020, and the company assumes no obligation to update.
Long term targets equally integration targets, an aspiration, who goes presented today should not be interbred in any respect misguided.
Today's call also include non-GAAP financial measures and explanation of these measures that's was reconciliations between GAAP and non-GAAP measures I contain no presley's and slide presentation.
During today's presentation and additional to all reported financial results. We will provide revenue comparisons on a pro forma basis, which includes full historical revenues off the artisan acquisition in prior periods. In addition, we'll provide revenue comparison on an organic basis, which excludes the cone.
Provision Austin American.
We believe these data will help investor a better understanding the performance of our results details of arson historical revenues by markets can be found on our website with that let me pass the call to all president and CEO, you've all Watson evolve.
Thank you Edwin.
Good morning, everyone and thank you for joining us on this call.
Before I start let me touch on the outbreak of Corona virus.
We are taken this straight seriously and they have assigned an executive led the global team to mitigate risks and manage any impact on the rightfully base and operations.
Since our most important priority is to health and safety of our employees. We are taking a prudent approach in restarting our Chinese production facilities in coordination in compliance with local government.
We have opened all our factories, however, with the uncertainty due to disruption in transportation.
Government imposed limitation of people density in commercial buildings and the slow rate of free starting supply chains uppity extend the break our assumption you did talk production output would be affected and for that reason, our Q1 revenue guidance would be set below our growing customer demand.
As a situation continues to evolve we are actively collaborating with our suppliers and customers to mitigate the impact on shipments.
Now, let me turn to our business the fourth quarter Mark is strong finish to a transformational year for advanced energy.
Our quarterly revenue and earnings surpass the top end of our guidance ranges driven by market recovery in the semiconductor ate then in data center computing verticals and incremental revenue growth.
From multiple proud design wins.
On a pro forma basis, including a fourth quarter of artisan revenue in prior period.
Q4, total sales grew over 17% sequentially.
Our team executed well to meet the increase demand while at the same time continuing to focus on expanding our design win pipeline with new products and technologies to support future growth.
This quarter, we also started shipping products from our new factory in Malaysia.
Following initial customer qualification consistent with our strategy and the inline with our customers current and future manufacturing plants.
For the full year 2019, despite sluggish market condition for most of the year I revenue increased nearly 10% to a record level of $789 million.
We generated incremental revenues from our acquisition of artisan embedded power.
Our decision was solidly accretive to our Q4 results and the integration is going extremely well.
Going into Q1 demand for products remained strong and growing however, as mentioned earlier, we expect our near term revenue outlook, so be impacted by the evolving situation in China related to Corona virus outbreak.
My forward looking comments will focus on demand trends, we see if Russia markets, while Paul will provide you with more details around the impact of the Corona virus on our operating outlook.
Turning now to our markets in performance in the fourth quarter.
Our sales into the semiconductor equipment market grew by 30% sequentially more than doubled the anticipated growth rate.
Market condition to continue to improve during the quarter with strengthening foundry logic and an increase in memory demand coupled with an end to the inventory drawdown at key customers.
More importantly design wins, we secure previously started to contribute to revenue growth and further strengthen our position as our customers.
Our semiconductor service business was about flat sequentially with improved demand in Asia offset by continued softness in North America.
Based on our strong bookings and pull rates put that to date, we expect overall demand in Q1 from the semiconductor equipment market to grow in the mid teens sequentially.
It's our December analyst day event, we can we outline our growth strategies across the company, including details for our semiconductor market.
I'm pleased to report solid progress when these growth initiatives.
During the quarter, we wanted designed into multi wafer chamber deposition tool with eight is unique integrated our if architecture based on the technical and cost advantages of our solutions also AG penetrated additional customers with a remote plasma source due to our products high.
Density Superior Chamber life, and low cost of ownership.
In addition, we shipped multiple units of evolves our beyond our if power solution to three strategic customers for evaluation.
Customers are recognizing the benefits of our pioneering tunable energy technology that essentially a lowest process engineers to tailor the eye on energy profile to each specific application.
Lastly, we show good traction with a broad portfolio of semiconductor power solutions, which will continue to drive increased dollar content with enough customers products.
Overall, our strategic decision to accelerate R&D investment over the last several quarters is beginning to pay dividends.
Customers are aggressively developing next generation process solutions and our products are being adopted into new platforms.
As our design win pipeline continues to strengthen.
We are confident that our sales into semiconductor applications will continue to outgrow the market.
Turning to our industrial and medical markets on a pro forma basis sales were about flat sequentially.
Macro market conditions remain challenging, especially in Europe, and China as we experienced weak demand from industrial production in auto industries.
Demand from solar customers were particularly light in the quarter as we did not see any significant project investment, especially in China.
This was offset by near term improvement in flat panel display driven by immobile well it applications.
And the continued strength in the medical equipment market across multiple applications, such as diagnostic systems surgical tools medical lasers, and Chris medic lasers.
In addition, our industrial embedded power products, so strength across multiple applications, such as motion control robotics, horticulture, three D printing and food processing.
At the same time, we were successful in converting numerous proud design wins into revenue.
In the medical equipment than analytical instrument market, we more multiple design wins, including an important one for a DNA sequencing application.
We are regaining momentum in the medical space with our 2019 cells to one of our key medical device customers grew over 30% ended Q4 revenue from another leading customer reached its highest level in the last two years.
And in the industrial space for advanced power products, we secured new design wins for next generation glass manufacturing industrial coating in flat panel displays.
Looking forward, we expect demand from industrial and medical vertical to be down sequentially. As several large programs were completing you for interim continued overall market weakness. However, long term, we expect solid growth from this market.
Given our design wins and improved market conditions overtime.
Demand into data center computing market was substantially stronger than we anticipated.
Our Q4 sales into this market was 70% sequentially.
Any pro forma basis, driven by faster than expected ramp of multiple design wins, it's hyperscale customers and improvement in the overall datacenter computing market. After a weak first half in 2019.
This quarter revenue for Hyperscale exceeded our expectations as we gained significant share at a tier one hyperscale customer with a customized several power shelf solution.
In addition, we gained market share at a key enterprise computing and storage customer due to our high quality and ability to meet their requirements.
Looking forward, although revenues may be lumpy given the large size of hyperscale projects. The successful ramp of existing design wins in our pipeline of new opportunities position us to grow in this vertical in twentytwenty.
With an industry, leading efficiency in power density deep engineering capabilities and strong application knowledge, we are gaining share in this market.
Turning lastly to telecom and networking.
As we projected during our last quarters earnings call, we still sluggish market for telecom and networking equipment in Q4.
Currently demand from both telecom infrastructure and networking equipment OEM each week.
Due to the general slowdown in IP is infrastructure investments.
Many telecom providers are leveraging the investment in LTE advanced for the initial fiveg deployment, which is pushing out their next generation fiveg infrastructure spending.
That said, we're actively engage on a multiple fiveg base station designs.
In addition, recent design wins for next generation Enterprise and data Center network and application have started to drive sales, partially offsetting the weakness in the market.
Overall, we are projecting continued near term pressure in the telecom in it for key vertical and expect demand to approach and trough within the next one to two quarters long term, we believe that drivers such a fiveg in enterprise refresh would support growth in this vertical.
Let me now give you an update on our progress with our Orthos an acquisition.
In the first few months since to close we've already made significant progress leveraging strength across the combined company. We are building an integrated company with a functional organization for efficiency speed and accelerated innovation.
Recently, we combined our salesforce into a single team, which will drive key account in channel synergies global reach and efficiency.
We've also integrated manufacturing operation under a single new leadership team, which will enable us to drive factory consolidation and efficiency across the company in supply chain leverage.
Well the full impact will take several quarters, we are already seen tangible benefits from combined supply chain activity. Further I'm pleased to report that our cross selling efforts have yielded a first bookings for our embedded power products for use in Brazil, we power applications in wafer fab.
Whitman.
This win gives out the confidence that overtime, we will gain share in this $170 million new market opportunity.
As we goes through Twentytwenty I'm increasingly confident in our ability to deliver on our target synergies into create value to all our stakeholders.
In summary.
I'm very excited at our Q4 performance ahead of expectations. Our design win successes the strongest distribution of our operating team and the solid progress we are making integrating artisan embedded power.
While the Corona virus is impacting our operations and supply chain in near term.
Demand from our market is strengthening driven by the growing need for solutions that enable the fourth industrial Revolution.
Continued focus on enabling our customers innovation through our technologies and products is driving our growth pipeline of design wins in contributing to our revenue growth.
Our strategy to be the pure play a leader in precision electrical power is resonating with our customers.
We are executing our profitable growth plans by targeting growth markets, gaining share across our verticals and expanding into new and exciting opportunities. All these position us to deliver meaningful growth in revenue and earnings in Twentytwenty.
I'd like to think our customers shareholders partners and our valued employees for your support I look forward to seen many of you any upcoming quarter.
With that let me turn the call over to Paul Paul.
Thank you ball and good morning, everyone.
Total revenue for the fourth quarter 2019 was 338 million up from 175 million in Q3, which only included a partial month artisan.
Excluding artisan organic revenue grew 18% sequentially and 3% year over year 259 million.
On a pro forma basis, including a full quarter of artists and revenue in prior periods Q4 revenue grew 17% sequentially and date and half percent year over year, driven by strong growth in semiconductor equipment and data center computing.
For the full year 2019, we recognized record revenues of $789 million, reflecting 9.7% growth over 2018.
Excluding artisan our 2019 revenues were $569 million down 21% from 2018, primarily due to the downturn in the semiconductor equipment market in the first three quarters at the year and ongoing macro weakness affecting our industrial products.
Before I talk about our sales by markets I want to note that my forward looking comments for Q1 reflect our demand outlook not revenue.
I will cover cover our revenue outlook at the end of my comments, given the potential impact on our operations of the evolving situation in China.
Semiconductor equipment revenue for Q4 was 125 million up 30% from last quarter and 16% year over year.
On a pro forma basis semi revenues were up 28% sequentially driven by 41% sequential growth in semi product sales.
We saw continued growth and OEM demand driven by investment in foundry logic, some recovery in memory and incremental contribution from our prior design wins.
For the year semi revenues were $403 million down from $534 million last year.
Looking to Q1, we expect demand and semi to grow sequentially in the mid teens with growth from both foundry logic and memory applications.
This outlook would represent year over year growth of greater than 45%.
Revenue from industrial and medical markets was 97 million up significantly sequentially and year over year to the addition of artisan.
On a pro forma basis revenues were down less than 1% sequentially.
During the quarter, we saw continued macro weakness in several of our industrial sectors that we were able to largely offset these macro trends with shipments of specific programs, resulting from prior design wins for both existing and new embedded power products.
Artisan products contributed 61 million of sales.
To the industrial and medical markets in Q4, which was up 3.3% from Q3 on a pro forma basis.
For the full year industrial and medical revenues were $246 million up from 185 million in 2018.
Excluding artisan 2019 revenues were 169 million with it declined due mainly to weaker demand in flat panel display consumer electronics related decorative and optical coatings and glass manufacturing in Europe and China.
Looking to Q1, we expect demand from this market to be down sequentially, our normal seasonality and the absence of the onetime projects in Q4.
Data Center computing revenue was 78 million with significant growth versus the partial quarter recorded in Q3.
On a pro forma basis revenues were up about 70% sequentially and 27% year over year based on the significant share gains, particularly in hyperscale that you've all discussed earlier.
In Q1, we expect demand to show modest sequential growth from the record Q4 with continued strength in hyperscale offset by seasonally lower demand from enterprise computing customers.
Telecom and networking revenue was 38.5 million.
On a pro forma basis revenues declined about 20% from Q3, which was inline with our expectations and commentary last quarter.
Looking forward, we expect continued pressure in this market with demand bottoming out in the next one to two quarters.
With our new market disclosures service revenues are counted within our four market verticals, but.
But on a standalone basis, our Q4 service revenue was $26.7 million down slightly from Q3.
For the year, our service revenue grew 2% $211 million.
However, if we exclude the central inverter service business that we sold in May of 2019 revenue grew 7% for the year, Despite lower factory utilization by our customers.
Gross margin for the quarter was 33.2%.
Cost of sales included approximately 6.8 million of acquisition related charges and $2.2 million facility expansion and relocation costs, primarily related to our strategic investment in the Malaysian factory.
On a non-GAAP basis gross margin was 35.9%, which is at the high end of our guided range.
Gross margins benefited from lower fixed cost absorption on higher revenue and lower warranty costs.
Look into Q1, we expect adjusted gross margins to be in the 34% to 36% range.
GAAP operating expenses in Q4 came in at $90 million, including 5.3 million of intangible amortization $2.6 million of acquisition related charges 2.1 million of stock compensation and $2.1 million of restructuring and transition expenses.
In addition in Q4, we recorded a onetime reserve a $4.2 million for doubtful accounts related to our exposure in China to certain program delays and business conditions that have been further impacted by the krona virus.
This is reflected in both our GAAP and non-GAAP operating expenses.
Non-GAAP operating expenses were $78 million, if we exclude the onetime reserve our non-GAAP operating expenses came in below the low end of our guidance range on good expense control and initial synergy savings.
Looking forward, we expect adjusted operating expenses in the first quarter to be between 73 and $77 million.
GAAP operating margin for the quarter with 6.6%.
Non-GAAP operating margin was 12.8%.
Non operating expenses on a GAAP basis came in at 4.8 million.
On a non-GAAP basis non operating expense was 3.8 million made up a $2.3 million of net interest expense plus 1.5 million in foreign exchange loss and other items.
Looking forward, we expect non operating expense to run in the $1.5 million to $2 million range.
In Q4, we recorded GAAP tax expense of $6.9 million or 40% higher than normal due to the nondeductibility of certain transaction costs.
Our non-GAAP tax expense was 6.2 million or 16%.
Looking forward, we expect our GAAP and non-GAAP tax rate to be in the range of 16% to 18% with the addition of artisan.
On a GAAP basis earnings per diluted share from continuing operations were 27 cents compared to earnings of 19 cents last quarter and 50 cents last year.
Non-GAAP EPS for the quarter was 87 cents.
Above the high end of our guidance due to higher revenue favorable gross margin and good expense management.
This compares to 54 cents in the prior quarter and 73 cents a year ago.
Turning now to artisan.
Q4 was the first full quarter of integrating artisan and the team has done a great job accelerating our efforts to realize the synergies of this acquisition.
As of the end of Q4, we have realized synergies equivalent to over $10 million on an annualized basis.
Combined with our strong performance in data center computing arson was solidly accretive in Q4, adding more than 20 cents per share to our non-GAAP earnings, including the interest expense of financing.
While the level of accretion will fluctuate from quarter to quarter. We remain confident that we are well underway to achieve our 18 to 24 month target earnings accretion of over 80 cents.
Turning now to the balance sheet.
Operating cash flow from continuing operations was approximately $19 million.
Which includes several onetime payments related to the artisan acquisition.
Excluding these onetime payments operating cash flow was over 45 million.
We ended the quarter with cash and marketable securities of 349 million up 8 million from Q3.
Total debt was 339 million after amortization payments on the loan.
Receivables decreased slightly and Dsos were 66 days.
Inventory decreased by $11 million and turns were 3.9 times.
Payables decreased to $170 million due to timing of receipts and payments and represent 68 days depot.
Capital expenditures for the quarter were 9.5 million and depreciation was 5.5 million.
The higher capital expenditures reflects a full quarter of artists and Capex as well as increased investment related to the new manufacturing facility in Malaysia.
During the quarter, we did not repurchased any shares.
Now, let me turn to guidance.
Looking forward, we continued to see strong demand for our products and expect sequential growth in orders in Q1 led by semiconductor and data center markets.
In addition, while visibility is low in the second half we are encouraged by recent projections for improvement in our markets and believe that overall 2020 will be a solid growth here in both demand and revenue on an actual and pro forma basis.
In the near term, we expect revenues to be impacted by the challenging environment in China related to krona virus.
As a result, we estimate revenues to be $310 million, plus or minus 30 million in Q1.
We estimate Q1 non-GAAP earnings at 70 cents per share.
Plus or minus 30 cents.
Due to the uncertainty created by the Nobel Krona virus outbreak, we're providing a wider guidance range based on our teams current assessment of our supply chain product delivery and production planning.
In the near term, we expect to see some increased costs for expedite fees transportation and factory utilization as we actively work with our suppliers and customers to mitigate the challenge at fulfill our increasing backlog.
As a note given our China footprint, we expect artisan products to be relatively more impacted and to represents just under half of our guided Q on revenue, but to still be accretive to non-GAAP earnings.
I want to stress the demand for our products is strong continues to grow and is above our revenue guidance.
Although the Corona viruses disrupting our supply chain in the near term. We believe continued recovery in our markets are increased revenue diversity as success and securing additional design wins should mitigate the near term impact and still enable solid growth year over year for 2020.
Combined with our efforts to realize synergies, we expect to accelerate earnings growth and improve return on invested capital overtime.
With that we will open the call to your questions operator.
Ladies and gentlemen, if your question or comment at this time. Please press the star than the one key on your touched on telephone. If your question. That's been answered you were similar yourself from the Q. Please press the pound.
Our first question comes from Quinn, Bolton with Needham and company.
Hey, guys. Congratulations on the strong fourth quarter results. Thanks, Thanks for all the qualitative color around the impact near term on the Corona virus, but wondering if you might be able to give us some sense of how much you shaved off the March quarter Guide.
Due to the Judy outbreak, if I look through your segments.
Semi cap equipment and data center, both being up or demand for both segments being up sequentially.
Makes me think that you could have easily shave 20, or 30 million off off the March quarter guidance at the right kind of ballpark to be thinking about.
Hi, This is youve, yes, pretty much let me expand a little bit done on the Corona virus.
We view that as a temporary situation.
Obviously, it's evolving daily with high level of uncertainty, but we're highly confident in our team's focus and strong execution.
And on nimble agile operation, we have opened our Chinese factories and actively manage our supply chain and operational risks.
Many of our suppliers in China I have just reopened the factories yesterday February 17th.
While some if not restart again.
We are implementing different solutions to expedite delivery of materials to the comment that Paul.
Said earlier and component through alternative channels and transportation means.
We're accelerating the return of direct labor to work and ramping up production capacity in factories outside of China.
You know our strategy to have multiple factory strategy around the globe is helping us as we have capacity in Malaysia and the Philippines.
Some of our support functions are an uninterrupted because people work from home people like demand planning management.
Et cetera are working from home. So again, we viewed that as a temporary problem and we wish to restart seeing signs of recovery.
Great and just a follow up for Paul the gross margin guidance of 34% to 36% sounds like it doesn't include some sort of near term effect from the virus you mentioned the expedited fees.
Can you give us some sense is that impact.
Mm 100 basis points or any any further guidance you can kind of give us this to the near term impact from some of those expedite another other.
Costs, you're encouraged because of the current a virus.
Yes, I think obviously gross margin is amalgamation of a lot of factors right.
And certainly our semi demand is strong and.
I will benefit the mix a little bit and in the next quarter.
But broadly speaking, there's probably a 50 to 100 basis point impact from just inefficiencies associated with the krona virus.
That's baked into that number.
Great and then last question for me, you've all yesterday the Wall Street Journal published an article, saying, Yes, Commerce Department, maybe looking to change the foreign direct product rule and require export licenses for semiconductor capital equipment to.
Worldwide Fabs I know this is sort of very recent news but.
Have you considered what impact.
Such a change in the foreign direct product rule might have on your business or is it too early to.
Quantify.
When right now we don't believe that this will impact us significantly.
Okay, great. Thank you.
Our next question comes from Tom Diffely with D.A. Davidson.
Yes. Good morning first Paul question on the backlog I looked like it was down about 11% sequentially I would've thought that this is the time of year will be ramping up.
Had a nice semi ramp here.
Yes, Tom one thing you have to remember is our backlog is only a partial reflection of our orders because vast majority of our semi product is pulled on adjusted time basis, and so that activity is not reflected in the backlog.
Okay makes sense.
And then I guess, you're talking about France, and the demand that you're seeing right. Now are you seeing is your demand close to equaling. What you think the end market demand is or do you actually seen your customers start to build some inventory ahead of their ramps.
Well I wouldn't say, we're seeing our customers build inventory, although the pull rates in December I think were were strong as you saw from our revenue.
But I think that overall the markets up and we're growing faster than the market for a number of reasons. One I think we have good exposure to foundry logic, which is what's driving a lot of the demand right now.
Secondly, we have seen incremental benefit from some of our design wins that we've talked about over the last few quarters and third we had a headwind last year relative to inventory at our customers that basically all sold through Q3. So we're not seeing that headwind anymore, which is giving us effectively the benefit of fast.
Growth in the market, where last year, we saw the other side of that.
Okay.
And then also you talked about 20% contribution from artisan that that's a little bigger than we were expecting that was or more to with the just the nice ramp on the data center side or is the cost reduction what drove the upside there.
Well it is a combination of things and 20 cents as what we said 20 cents right 20 cents of incremental.
EPS or accretion that after finance interest costs.
But yeah. It is we've seen good good good revenue pick up we have also been able to see the the initial benefit of some of the synergies that we've implemented.
We are at an annualized rate of savings coming out of Q4 of a little over $10 million, which we think is directionally right on track to achieve our longer hauls. Those are coming from a number of actions are able to take right off the bat around corporate costs. Some initial structuring.
Restructuring that we did.
You know some some actions that we took in in the sales channel to get some efficiencies. So we are seeing the culmination of those things leading to.
The benefits that you see there and the accretion we're excited I think we're off to a good start and we're especially excited about how the organizations are coming together and working together.
Right out of that.
Tom the other great news about the artists and acquisition.
We already started generating.
Bookings.
From the semi wafer fab equipment industry.
For the Arthur some products.
And this cross selling opportunities that we talked about as a potential.
Revenue synergy is coming faster than an earlier than we thought so this is really exciting.
Okay, Great and then finally when you look you I guess you talked a lot about how.
The supply chain was impacted by the clinical ever split about or what do you see on the demand side any interruption disruptions there.
We go ahead, yes.
So I.
I think it may be too early to see that impact, but we certainly had seen no change in sort of the demand pattern that we saw coming out of Q4 and into Q1 is you've all mentioned, we've seen a strong start to the quarter.
And I think the demand picture continues to be robust.
The demand continues to be strong and robust.
We do not see any additional demand driven by concerned about that locations or shortage. We just see healthy demand driven by market needs in semi for example, one area.
Datacenter computing another area.
Okay. Thank you for your time share thanks, Tom.
Our next question comes from Krish, Sankar with Cowen and company.
Hi, Thanks for taking my question well I just want to go back to one of the earlier questions on the you know the Wall Street Journal articles speculation.
You said that you see minimal impact impaired acute is that.
Until more based on you talking to your customers.
I'm just kind of curious like why you thing does that mean minimal impact for the sector. If if that article is true.
It. This is based on our assessment on note and knowledge of our customer base and where we sell obviously, we did not talk to our customers instead of Wall Street Journal articles published.
As you know we sell worldwide, we are manufacturing worldwide.
We have customers around the globe and.
Right now when it comes to the near term, we don't see any significant impact on our business long term, we don't know.
Got it got to that's really helpful. You all and then.
And just a question on Yoder facilities in China, you said that it is open.
But the production output as affected I'm critic is what is the bottleneck is it really labor getting all the people on board and like you know trying to ramp up the factory.
What does a bottleneck in that supply chain ramp up and typically how long will take to wrap it up to under closing utilization.
So it's a combination of practically threed driver is the first driver.
It is basically immediately after the Chinese new year and the extended.
You know length of the holiday by the government is the rate of return of employees back that accompanies and back to the factories.
And it was it was driven by limitations of transportation vehicles and means of transportation.
Areas in China, there with under quarantine by the government.
And and the rate of return was also controlled by the government locally that wanted to ensure that factories I will say for the employees and the safe the health and wellbeing of our employees in a number one priority and we put together a significant measures.
In means to ensure.
That that vis vis.
Health Barclays is protected.
So the rate of return and it's it's it's ramping we see growth in the number of people that are.
Going back to work across our factories. The other area is supply chain as I said earlier some of our suppliers are back to work.
Pool.
Not full capacity some of them are ramping and there are small suppliers, especially closer to areas that are in the epicenter.
That had been studied yet we're working closely with our suppliers. We're also working with how does an inventory that is in the pipeline in the channel to ensure that we can get that inventory into our factories.
And lastly, the third aspect is is is the ability to move material around.
In various transportation means and when we talk about expediting fees.
And investment in other ways and means to get material, it's exactly that how do we have reroute material in channels and and and.
Interest rotation means that will ensure that we get the materials to the factories. So its multifaceted.
Got it.
So loved to the color you all just one final question, so nice to see them Alicia if there's going to do ramp up.
But the divided does this delay youre, the China facility consolidation or do you think that some.
Timelines no it's totally independent.
In fact, we were in the process of ramping our Malaysia factory.
And because of this chronic virus situation, we are accelerating the ramp up there in Malaysia factory, obviously, well we all we also need to remember the some office supplies that go into the Malaysia factory come from China.
So it's a it's a bit so basically it very carefully planned an executed.
Strategy around how to get material, how to get labor and how to ramp we are shipping products from the Malaysia factory to our global customers.
Thank you okay, well thank you.
Our next question comes from Amanda Scarnati with Citi.
Hi, Good morning, Thanks for taking my question I mean.
Onto the Corona virus hopefully.
The last question on it could that under shipment up demand being back in the June quarter or part of a longer term trajectory.
How come off the line.
You have a coffee in your thoughts around.
And significantly higher rate.
<unk>.
Yeah, I think at this point in Amanda the environment continues to evolve it's fairly uncertain, how fast things can ramp backup.
But we think it would probably realistically take a couple of quarters.
Before we would see a full recovery.
That could be a little longer a little shorter depending on how fast things come back.
But theres a lot of lot of variables, we don't know at this point.
Okay.
And then you mentioned and non telecom and networking that demand is down in the March quarter, you expect another one to two quarters continued pressure before that.
That's spot on.
Talking about what you're seeing there and what gives you confidence in.
The back half of the year I think RTC from Romney recovery.
Well I think we're entering potentially to the bottom of the market within a quarter or two and this is mainly driven by multiple factors first of all.
As you know that.
The consensus out there is that the market will recover later this year and we tend to agree with that.
We saw a delay of investment in infrastructure.
Our on Fiveg, there's a lot of a combination of government and industry for us acting upon the the infrastructure investment in Fiveg. The the the use of LTE advance for Fiveg applications.
Push the investments further out.
There are some government involvement around Fiveg investment as you heard from the UK and other areas and also the you the impact of the Wawa situation May also impact the.
The global market.
We are well position.
To serve this fiveg and teleco market when the market recoveries because of our strategic relationships very close relationship with some of the leading companies that make those.
Radio towers and the infrastructure. So there's no doubt in our mind that we will see that recovery.
And when the markets recover we expect to benefit from that.
And then just following up on that can you comment on what your exposure to walk away.
I understand what impact if not de Minimis rules that.
Alright.
While were is a small small customer of ours.
Very small volume.
And we serve this customer through our engineering teams and manufacturing in Asia.
Great. Thank you.
Our next question comes from problem will turn off with Raymond James.
Thanks for taking my question you mentioned that the legacy artisan business is more.
Both to the Corona virus uncertainty than the legacy AG business why why exactly if that.
Well, we mentioned already that one of the large factories for artists and is in China.
And so there's there's exposure there, but I would say on balance the supply chain in artists and because of the nature of the products is more China based as well. So it's the combination of those two things.
Okay and balance sheet question your net leverage.
Very quickly I turned negative as it has been obviously for many many years.
He is debt reduction still priority for you to bring down that 339 million at that.
It is.
Obviously, we've been making amortization payments, so talk to debts already down $11 million from five months ago four months ago, only when we took that that out but as we continue to see sort of healthy cash generation, that's our number one priority.
Is that reduction I know this quarter, our operating cash flow was about $19 million total cash increased about $9 million, but underneath that we had a lot of deal related cash costs. We had some act we paid a lot of the acquisition related fees and as part of the transaction we.
We assumed a number of payables from from the legacy company.
Artisan and those are all pay down so if we exclude those items our underlying cash flow was over $45 million, we think thats very encouraging and should give us a lot of leverage going forward, but I just want to note that our net cash was actually positive.
In Q4, it was negative in Q3, but in Q4, the combination of the higher cash balance and the payment on the debt did move at the positive this quarter.
Okay.
Appreciate it.
Yes.
Our next question comes from Patrick Ho with Stifel.
Hi, Good morning, it's Brian actually calling in for Patrick Thanks for letting us after a couple of questions.
Maybe first on.
On the semi cap. This assisted go back to a line of questioning and just to clarify.
It sounds like you're Semicap shipments in Q1, you're saying they should be sequentially, maybe flat to down 10%.
It is worth what do you think the organic demand is just want to clarify that sort of ballpark and then also in light of what's transpiring I'm wondering if you think your customers are going to naturally request to add a maybe a buffer stock.
Player here, given sort of just from a.
If supply chain sort of safety of supply standpoint.
Yeah, Yeah. Thanks, Brian first thing thanks for asking the clarifying question, we Didnt actually say.
By market, how the demand would be impact other than the artist wouldn't be impacted or the embedded power products would be impact we think slightly more broadly speaking I think our you know we the demand pattern will somewhat drive.
The underlying revenue so I think those proportions.
You know probably hold and we expect semi to be up which means a relatively less impacted.
If you look sequentially.
The.
Second.
Well, our customers and semi as you know.
The pool material when they needed from our adjusting time inventories.
And our adjusted inventory testing time inventories have bins with inventory in them.
And this this inventory acts like a buffer.
Mhm.
Okay.
And just a a question about data center from does.
It sounds like.
The semi cap as us between foundry logic memory do you think theres any more impact near term if it takes maybe a quarter or a couple of quarters, the sort of catch up there and any one particular, there that might be more impacted.
Other thing we can answer the question.
Okay Fair enough on data center is our way is obviously.
Even on a pro forma basis nice sequential jump there in Q4 as our way of characterizing what your revenue.
And our growth in Q4 might have been for data center, excluding the share gains. So just kind of understand trying to understand what the natural market growth right now than.
Paul in the second.
Thank you.
Hey, Brian does that one just to give you some call on the data center, where we would quantify the majority of the game growth, we God sequentially. The 70% sequential growth that we talk about vast majority or is it with the shaking.
Vast majority share as we said one we had a tier one hyperscale customer dot ramp that it's a new customer. So let me give you a little bit more color. The data center Hyperscale, obviously, an important part of the business.
Over the last 18 months 24 months the company.
Had put significant effort in getting design into the Hyperscalers.
We view that the Hyperscale part of the data center computing is the fastest growing segment.
And for that reason a significant effort was put in gaining share.
In Hyperscale parts of the business so.
Most if not all of this increase giant increased to 70% increase.
In datacenter computing business is a result of these recently.
Juan design wins that are converted to mass production in high volume shipments.
Mhm.
Okay, and obviously, if you expect by strengthening in Q1 as well I know you reference it being sort of lumpy business.
It is our waste from the baseline perspective, maybe from a plan perspective, what you think the Tam there might grow at encounter 20, obviously, you guys probably going to grow well ahead of that but the way of kind of a baseline already if you want to bifurcate it by sort of Hyperscale versus enterprise, Yeah. I don't think I don't have the answer right now for that.
Right and they end up we can get back to you would that.
Okay No problem right now I'd like now right now, we believe we grow faster than the market and mainly because of those design wins.
And share gain that allows us to accelerate.
You know, we said the Hyperscale will grow at about 15% Cagar.
But that the Tam or be flattish right. So.
We can get back out.
Yeah, It sounds like based on sort of the way you're supply chains oriented and where the man's coming from that that doesn't seem like it's necessarily impacted from sort of the China effects.
I wouldn't say that I think that I think the China Corona virus effect impact all our products.
Okay.
Okay and just thank you yeah, just to be clear the China krona virus effect, we think as a temporary effect this affecting our ability to output out of the factory in the near term, we don't see it having a longer term effect on any of these markets at this point and it's just a matter of how quick things come up and we can get things can.
Turning to them and how quickly we basically fill that gap between essentially backlog or demand and the output we're able to achieve near term. We're very excited we're very excited with the continuous growth in demand for our products across the markets we serve.
We need to go through this.
Short term.
Situation in China before we recover.
Okay. Thank you.
Right.
Our next question comes from Mehdi Hosseini was essentially.
Yes, Thanks for taking my question a couple of follow ups.
You all is.
Been almost two months since your analyst day I'm just wondering if you have any additional thoughts on the core semi cap how do you see the market evolving throughout the year, excluding the krona virus and how is that different and your thoughts back in that mid December when you had your analyst I have a couple of follow ups.
Maybe I think I think that general consensus has become.
More constructive since our analyst day.
We so the market, becoming more bullish around added capacity.
Not only in foundry and logic, but also in memory.
And.
For US obviously, good news because we are quite balanced in the way we serve the market.
Both in foundry logic and memory.
Without without the impact of the growing of Irish which we believe is a temporary bump in the road.
We wouldn't assume that twentytwenty will be slightly better than we thought originally.
So there's more often.
Increased diversification in end market demand drivers is not just foundries now is beginning to see a pickup in memory is that correct correct correct.
Alright, and then just one follow and by the way with that May or do we see some we see some additional investment.
Driven by New technology advanced technology, no materials new processes.
Did you say that in your prepared remark did you said that the semi cap.
Revenue would be up mid teen in March versus December.
We said the demand demand up mid teens sequentially. Okay in the in the current coupon versus Q4, but that's the rate of demand yeah. Good good good good catch Mehdi.
Demand is up Weve mid teens can match, obviously, our ability to deliver.
To this demand is temporarily affected by the Corona virus situation in China.
But the demand continues to be strong show I guess, but but my question here is this a 130 million plus minus as to how like come up with the March quarter revenue attributable to semiconductor equipment, what I wanted to learn more is how to use.
See the cycle playing out into next two years independence in the prior cycle into seven 2016, and 17, you benefited from it multiplier because of.
Threed NAND and now as you look forward the treaty Nancy Stuebe, There and then you have additional years for diesel when you have a foundry.
Are we still gonna be looking at the past and thinking about a two to three time and multiply and factor and that's how we should model does for the next two years or do you have any other thoughts you can add to it.
So let me give you a high level kind of a quoting consensus.
Opinions and then maybe talking about what we saw.
Up to three years ago, when industry converted to Threed NAND. So.
Right now I think the consensus is that point between to be a growth here in 2021 will be a very strong growth here. That's the general consensus right and we were not market forecasters. So we basically look at what we hear and.
Registered that no general information.
Now.
In the U.S 16, 17, 18 first half what we saw.
Was a conversion of an industry.
From planar to Threed D memories, especially.
NAND.
That level of multiplication was driven by additional capacity Greenfield Fabs and also the fact, they've yields were relatively low.
We believe that the industry became more efficient yields are higher and the additional capacity, especially greenfield will not be at the level. We saw at 16 17. The first half of 18, that's the only commentary I can give you again, we're not we're not market forecasters.
However, as we have demonstrated.
We will still grow faster than the markets we serve.
As we have done in the past sure. Thanks for all the detail just quickly switching to Paul.
If your initial assessment were to play out and you see that second half uplift, especially as some of the revenue from the first half pushed out to the second half should we expect the absorption and gross margin recovery with gets you into the Fortys.
No I think that would be too too aggressive certainly our long term goal is to get margins up to the 40%, but that's on a fully synergized basis and with revenue level that start to approach. The 1.4 $1.5 billion range Mehdi, but certainly as volume picks up we get we get.
Efficiency improvement.
And we are actively working on on implementing the synergies overtime. So certainly our goal would be to continue to bring that margin, but that would be too fast to check you get to that level in the second half I'd say maybe.
You know broadly speaking there will be.
Modest improvement that direction, but certainly not getting to that level. Okay. How should I think about opex would go from 75.
Million.
Okay, I'm liking the midpoint.
Yes broadly speaking as revenues pick up we'll see some modest increase in variable cost.
But we don't we didn't make a lot of structural reductions during the downturn, we don't have to make a lot of structural adds going forward.
So I think broadly around this level.
With a modest.
Variable cost pickup is probably the right the right way to think about it.
Thank you guys.
I'm not showing any further questions. This carmel or turn the call back you've off for closing remarks.
Thanks, everybody for joining us today, we are extremely excited about the integration of partisan and the future. If the company we view the Corona virus situation as a temporary bumping erode.
We are seeing increased demand for our products from various end market verticals and we're ready to serve those markets as soon as we can in terms of our operation in China.
I'm looking forward to Sydney many of you in during the quarter. Thanks.
Ladies and gentlemen, does conclude todays presentation. You may now disconnect have a wonderful day.