Q2 2020 Advanced Energy Industries Inc Earnings Call

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Good day, ladies and gentlemen, and thank you for standing by welcome to advance Energy's second quarter 2020, <unk> earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone please be advised to today's conference may be.

Recorded I would like to if you require any further assistance. Please press Star then zero I would now like to have the conference over to on your speakers to eight Edwin Mok, Vice President of strategic marketing and Investor Relations. Sir. Please go ahead.

Thank you Michelle good morning, everyone welcome to advance Energy's second quarter to talking 20 earnings conference call.

With me today, all Yuval Wasserman, Oh, CEO, Paul the most useful and Brian Smith director of Investor Relations.

If you have not seen <unk> earnings press release, you can find on our website.

I always thought about dosh energy Dot com.

Did you also find a slide presentation deval almost discussion today.

Before I begin I like to mention Dodd said, if you will be participating out multiple investor conferences in the coming months.

[noise] events occur we will make the announcement.

Let me remind you that today's call contains forward looking statement, that's subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance.

Information concerning the risks and uncertainties its founding they'll filings FCC.

All forward looking statements are based on management's estimates projections and assumptions as of today August 15, 2020, and the company assumes no obligation to update them.

Long term targets presented today, which includes I'll ask Racino goes and the integration targets should not be interpreted in any respect such guidance.

On today's call I'll financial result will be presented on a non-GAAP financial basis, unless otherwise specified.

Any explanation and explanation about non-GAAP financial measures as well as reconciliation between GAAP and non-GAAP measures can be found in our press release today.

With that let me call pass the call to all the CEO you ball Watson you all.

Thank you Edwin good morning, everyone and thank you for joining us on the school.

This was a good quarter fourth branch energy with strong demand across several of our markets and solid execution, which enabled us to deliver financial results at or above the high end of our expectations [noise].

The continued challenging about it.

That's right. The band is fueled by multiple technology trends that are driving the data economy in the fourth industrial Revolution that result in an acceleration in adoption Jakavi 19.

In line with our growth and diversification strategy. The acquisition of proposition has expanded our exposure to these trends and vertical.

And we are ahead of plan in driving the integration of the combined company and achieving our spirits synergy goals.

Oh pure play power strategy focus.

And our integrated functional organization provide us with the synergy operational excellence and capabilities, which allowed us to score to deliver sequential growth in sleep well for a full market verticals.

Resulting in revenue of $340 million.

We generated non-GAAP bps, if a dollar in 18 cents above our guided range.

In our highest operating cash flow in two years.

In image of the current global pandemic, we continue to put the safety and health for private Louise and our communities first.

At the end of the second quarter all of our major manufacturing sites had returned to near full capacity.

Operating within hinge safety protocols, and physical separation that are above and beyond local government requirements.

Our supply chain continues to improve but we still see some bottlenecks that if we apply or proactive action two minutes shortages and on time delivery of raw materials.

Well the increasing global cases of copied 19. They involvement is very dynamic and unpredictable in our results may continue to be impacted more by operating conditions in capacity, then but on the buy underlying to me the men [noise].

Turning now to our market share performance.

Demand from the semiconductor market rule once again in the second quarter driven by continued strength in foundry logic applications and improved demand for memory applications, particularly in NAND on that transition to higher liver accounts.

Since reaching they cyclical trough in the second quarter of 2019, our sales into the semiconductor market grew by 61% year over year outpacing the Wi Fi and our peers.

This strong performance confirms our market share gains the increased power content in leading edge applications are extended product portfolio and the normalization of customers inventories.

With memory investment in this cycle remaining well below the less we believed that we're well positioned to continue to outgrow the industry when memory investments resumed.

Looking into the third quarter, we expect or sales into the semiconductor market to continue to grow.

As the leading innovator in semi power solutions, we continue to deliver groundbreaking technologies and products to enable our customers innovation.

At the recent Semicon West we introduced three new process power products, and a new configurable embedded power supply.

The process far products are being evaluated by multiple customers for Eylea Eylea advantage conductor etch and P.C.V. policies for leading edge logic and memory devices.

The other power supply HP is the latest up our broad portfolio of Configurable power supplies and these are high power multi output system that can be used for multiple auxiliary power applications in both front end and Bakken tools.

We expect suspect successful evaluation of this product to drive additional cross selling revenue and expand our addressable market within semi.

Beyond new products are leaving technology continued to generate new design wins in market share gain.

Design wins, we announced previously have resulted in RF match revenue in Q2.

That is almost doubled year over year.

In addition, recently we shipped several units of our own most advanced triple frequency navigator RF matching network.

Our focused effort drilling in remote plasma source has continued to drive growth each quarter as our superior process performance and long chamber lifetime resonate with customers.

Finally reached in design wins in etch and dry cleaning applications continue to strengthen our position at Korean Oems.

You know industrial and medical markets revenue grew sequentially driven by strong demand in medical applications improve ability to deliver products from our ramping factories and initial recovery from the product transition by a large customer we discussed in Q1.

Although we grew sequentially macro weakness exacerbated by copied 19 continues to limit the overall industrial market.

Within this environment Q2 was one of our strongest quarters for medical products, it's very strong demand for coverage related critical care and medical applications more than offset we can demand in elective and cosmetic procedures.

In addition, we won multiple new designs for applications, ranging from DNA sequencing and mobile X Ray just surgical microscopes.

Looking forward to Q3, we expect revenue in the industrial and medical verticals to grow sequentially supported by ongoing demand in medical and how you prove production capacity.

Revenue in our datacenter computing market was down slightly from record levels last quarter with continued sequential growth in hyperscale offset by lower enterprise computing revenue due to supply constraints.

Overall datacenter computing grew 89% year over year on a pro forma basis and hyper scale was up more than five ex over last year's performer level due primarily to our market share gains.

In addition, we begin shipping production units to a third major hyperscale customer this year as we secured a leading position in its common datacenter platform.

With a third major hyperscale customer, we remain confident and believe that the second half of Twentytwenty revenue in datacenter computing will remain close to two the robust levels seen in the first half assuming our manufacturing capacity is not affected by future waves of corporate 19.

At the Oh CP virtual summit in May we launch our next generation power shelf, which is designed to support the data center trend infrastructure migration to 48 volt. We have seen increased interest in a partial solutions from a widening group of datacenter customers ranging from game.

Turning and retail to consumer Internet and international cloud service providers.

With growing demand for artificial intelligence applications, a data center racks are projected to consume after seven times more power than traditional data set to Rex we believe our industry, leading power conversion efficiency in our continuing in innovation in data centers.

Power architecture will both drive our growth in play a critical role in helping the industry reduce electricity consumption.

Beyond Datacenters, our industry, leading power efficiency and power density will be important enablers for improving energy sustainability across many industries recently at Semicon West our customers applied materials announced its success 23 30 initiative advanced energy is one.

One of the six strategic partners working with applied towards a more sustainable supply chain by advancing our energy efficient products and our environmentally efficient operations, we are adhering to our commitment to sustainability leadership.

Finally.

Demand from our telecom and networking markets increased from the first quarter as these markets appear to be reaching a bottom. In addition revenue revenues in the second quarter benefited from high volume shipments of several prior design wins across multiple customers.

While investment across global Telecom infrastructure continued to be delayed by covered 19 and geopolitical tension strong demand for data center networking is generating increased sales for our products. During the quarter. We will next generation interconnect router design due to our industry leading power density.

Steve.

Looking into the third quarter, we expect to see revenue maintained around these levels long term global deployment of Fiveg infrastructure will drive new requirements for more advanced power systems.

To summarize.

Our operational excellence in execution allowed us to capitalize on strong demand from our customers and increased revenue.

As a pure play power leader, we grew our market leadership introduce innovative new products and realize the synergistic benefits of the artist and acquisition. While covered 19 is still effecting macroeconomic and operating conditions. This crisis is also accelerating the adoption of the technologies behind the fourth index.

[noise] revolution, potentially increasing the long term organic growth rate in our core markets.

Overall, we're executing our strategic plan to grow faster than our markets and to accelerate earnings growth and we're making good progress towards achieving our long term aspirational goals of over $1.5 billion in revenue over six and a half dollars non-GAAP EPS and over 20.

3%, our Oh I see.

[noise] I'd like to thank our customers shareholders partners and our valued employees for your support, especially during these challenging times I look forward to speaking with many of you in the upcoming quarter with that let me turn the call over to Paul Paul.

Thank you you have all and good morning, everyone.

Before I begin. Please note that all financial measures presented today will be on a non-GAAP basis, unless otherwise stated.

Excluded from non-GAAP results, our amortization stock compensation integration and transition costs unrealized foreign exchange gains and losses and restructuring items.

This quarter, we recorded 5.8 million in restructuring costs related to the transition of manufacturing from Shenzhen to Malaysia and.

And other actions associated with synergies related to the artist in acquisition.

We also recorded 1.1 million in noncash unrealized FX losses related to long term lease and pension liabilities.

A full reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today.

And our second quarter, we delivered outstanding financial results exceeding expectations and guidance for revenue gross margin operating margin and cash flow generation.

Our team's strong execution and the challenging environment enabled our non-GAAP EPS to be above our widened range and our annualized return on invested capital to increased to over 20%.

Cash increased by $28 million and we generated additional synergies from the integration of artisan.

Second quarter revenue was a record 340 million up 7.7% from 315 million last quarter and up 152% from 135 million a year ago.

On a pro forma basis, including a full quarter of artists and revenue in prior periods.

Due to revenue grew 24% year over year with strong growth in semiconductor and data center computing markets, partially offset by declines in industrial medical and telecom and networking.

Excluding or artisan organic revenue grew 11.5% sequentially and 34% year over year to 180 million.

Turning to revenue by market.

Sales in semiconductor in Q2 were 145 million up nearly 9% from the strong first quarter and up 61% year over year.

On an organic basis semi semi revenue grew 60% year over year with strong demand from foundry logic and higher investment in NAND memory.

Semi product sales were up over 9% sequentially and 88% year over year.

Semi service revenue also grew about 9% from last quarter that declined 8% from last year due to covert 19 related capacity constraints in some of our service centers.

Overall, our semiconductor revenues have grown faster than.

WFP and the vast majority of our peers, both year to date and year over year in Q2.

Revenue from our industrial and medical markets was 71 million up 14% sequentially. As a result of growth related to critical care medical devices increased them film market demand and our improved ability to deliver products.

On a pro forma basis revenue declined 23% year over year, driven by general macro weakness in several of our industrial sectors exacerbated by the code 19 crisis.

Datacenter computing revenue was 83 million down 3% from the exceptionally strong first quarter, but up 89% year over year on a pro forma basis Hyperscale continued to grow offset by lower enterprise revenues, mainly due to capacity constraints in our Philippine facility.

Telecom and networking revenue was $40 million up nearly 20% sequentially on solid shipments of our design wins.

On a pro forma basis revenues declined almost 14% year over year as global Telecom infrastructure investment continued to be impacted by the pandemic.

Non-GAAP gross margin for the quarter expanded almost 100 basis points sequentially to 38.7%.

Margins benefited from substantially better than expected product mix and material cost.

And positive other cost of sale items, partially offset by increased costs related to coven.

In addition, we improved factory utilization overall and are beginning to see the impact of some of our synergy actions.

Although we do not expect all of these favorable items to repeat next quarter. We continued to make steady progress on our goal to improve overall gross margins to greater than 40%.

Non-GAAP operating expenses were 77.8 million up 3 million from last quarter, primarily related to increased R&D investments and variable expenses associated with the higher revenues.

Expenses as a percent of sales improved almost a 100 basis points, demonstrating the synergy and leveraging our model and the under to at under 23% of sales is in the top quartile of our competitors, even as we continue to make critical investments to drive growth.

Non-GAAP operating income improved to 53.8 million and 15.8% of revenue.

Non-GAAP other expense was approximately $500000 down from 3.5 million last quarter, primarily on the timing of an insurance claim and subsequent recovery and on lower net interest expense.

We expect total other expense to be in the $1 million to $1.5 million range going forward.

Our non-GAAP tax expense was $7.9 million or 14.7%, primarily as a result of integrating artist and into our structure and favorable mix of foreign earnings.

Looking forward, we expect the GAAP and non-GAAP tax rate to remain around 15% to 17%.

Non-GAAP earnings for the quarter was $1.18 per share up 30% from 91 since last quarter on higher revenue and margins.

EPS was up over 150% from 45 cents a year ago.

The artist and acquisition continues to contribute Potter positively to our consolidated results.

He acquisition was solidly accretive in Q2, adding over 30 cents per share to non-GAAP earnings, including the interest expense of financing.

And as at the end of Q2 realized synergies today, we're over $20 million.

As a result, we have largely achieved our phase one synergy goals. After the first three quarters well ahead of our original plan at 18 to 24 months.

As we integrate Arsone, we've found new opportunities to further improve our costs, allowing us to reinvest part of the achieved synergies into R&D to drive faster long term growth, while keeping our long term operating margin goal of over 20%.

Based on the Great progress we have made we remain confident in meeting or exceeding our long term targets of $40 million of annualized synergies and a $1.50 per share in EPS accretion.

Turning now to the balance sheet.

We ended the quarter with cash and marketable securities of 383 million up 28 million from Q1.

Operating cash flow from continuing operations was $38.6 million, our highest level since Q2 2018.

Receivables increased on higher sales and DSL rose by one day to 62 days.

Inventory increased by $25 million and turns were 3.2 times, reflecting investments we made to manage risk in the covert environment.

Payables were 180 million, representing 77 days of depot.

Total days of networking capital were 97 up six days from last quarter.

Capital expenditures for the quarter was 7.3 million and depreciation was 6.6 million.

During the quarter, we repaid 4.4 million of debt and ended with total bank debt of $331 million, resulting in gross debt leverage of 1.8 times.

We did not repurchase any shares during the quarter.

Now, let me turn to guidance.

In the near term, we continue to see strong demand in our semiconductor market and anticipate continued modest improvement in industrial and medical.

We expect demand in the data center computing, and telecom and networking markets to fluctuate at around the current levels.

However, we continue to see changes in the environment related to cope with 19 as many environment. Many governments re implement certain levels of quarantine.

Factoring in the limited visibility and ongoing operating and macroeconomic risks related to coveted we're guiding Q3 revenue to $350 million plus or minus 25 million.

Based on anticipated mix volume and ongoing covered related costs, we expect non-GAAP gross margins to be in the 37% to 38% range.

The 150 basis points from last quarter's guidance as we gain more traction on our synergy and structural improvements.

Operating expenses are expected to be about flat, including increased engineering investment related to a new advanced electric etch evaluation program with the strategic OEM.

As a result, we expect non-GAAP earnings at $1.15 per share plus or minus 25 cents.

To summarize we delivered a great quarter operationally and financially with record revenues improvement in gross margin and operating margins and almost 30% sequential increase to our non-GAAP earnings.

Our pure play power strategy is enabling us to capitalize on market and technology trends across many of our verticals accelerate growth and realized synergy and operating benefits ahead of our plan.

We are well underway to building the business and financial model at the top tier industrial technology company and we are on track to meeting or exceeding our stated long term aspiration of goals.

With that we will take your questions operator.

Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your telephone if your question and financing I wish to remove yourself from the Q. Please press the pound key prevent any background noise. We ask that you. Please. Please your line on mute once your question has been stated.

Our first question comes from the line of Tom Diffely with D.A. Davidson. Your line is open. Please go ahead.

Yes. Good morning. Thank you for taking my question. So first I'm curious as we ramp up the semiconductor business right. Now you mentioned, obviously, a combination of markets and share gains and I'm curious are you seeing the beginnings of an inventory increase that your customers yet or is that still to come.

I can comment to that Tom I don't think we have enough visibility to report on our customers' inventory.

At this.

We expect I'm, sorry, I was going to say that through the cycle typically dim targets bled off the Olympians slowdown, but then you outgrow the market because both year end markets go up faster and also there is a build in the channel.

Maybe not specifically for customers, but just in general are you seeing a build that youre tools in the marketplace.

When inventory point of view.

Yes, Tom as you all said, it's hard for us to had exact visibility to our customers, but I can say that we continue to see steady Paul our been sizes are levels aren't really changing so we're not seeing increase in inventory in the bins and our senses our customers are consuming inventory at the rate we're shifting it.

Yeah, we don't see any up normal behavior at home and an art our demand continued to be strong.

And.

We're very constructive towards Q3 and Chevy.

Great and then Paul when you look at the new products.

What do you think the impact will be on margins over time as they start to become.

More accepted in the marketplace.

Well generally our new products, Tom have more innovation more capability in semi more more power or accuracy and as a result, we expect to sustain or grow our margins with our with our new products as we've done historically at other comment related to that Tom up as read that.

Hello products.

We rely on a future combined operation organization and platform. There is a combination of the traditional AG in the Arthur send very efficient operation.

So we expect to benefit.

From a.

A much more efficient manufacturing and lower cost for the factoring for future products.

Some of these products will be vertically integrated.

And of course, as we transition in the product portfolio and complete the synergy enact activities with ours and all of these things you will contribute overall to our ability to continue to drive gross margins higher and above our goal of 40%.

Okay, and then finally for making great progress drove that.

Yes, Okay and finally on Paul you mentioned that there were some supply constraints. It seemed like there was more centered around the datacenter business I just wonder if you can explain why hit that.

Segment of your market more than the rest.

Yes, I think you know as you look at at this point, our factories are largely up and running but we still have point issues with supply.

You noticed our inventory was also up this quarter part of that was an effort to make sure we had adequate supply to meet our customer needs, but you still need a full kit to ship products.

And a net and then in this case.

That particular market in a few products there were were impacted the most by supply constraints in the factory in and material.

Okay. Thanks for your time.

Thank you.

Thank you and our next question comes from the line of Quinn Bolton with Needham and company. Your line is open. Please go ahead.

Hey, guys. So let's start with the results and the guidance call I guess I'm scratching my head a little bit on the gross margin guidance. I know you guys had a much stronger gross margin the second quarter.

I look at the revenue mix shift in Q3, it sounds like.

Semiconductor, which is your highest gross margin.

This is gonna be growing the fastest so and overall revenue was up so you should get better absorption in the factories I'm just trying to understand why margin could be down 120 basis points at the midpoint.

It's a good question Quinn this quarter as I explained we had pretty much everything go right. Obviously, we had covering the cost, which which were unfavorable that we but that continues so as we look for we just don't see all of those things continuing to fall to the credit to the Rightside and.

Although a semi is up our mix within our overall product.

Portfolio into different product categories has as much impact as just one market or another and so on balance when we look at the operating activities in the third quarter, we do see margins down a little bit also note that while our factories are largely up and running we are focused on reducing.

Inventory and we have inventory position into hubs in other areas, which we expect to drawdown, which is part of the revenue increase in Q.

In Q3, not necessarily all higher factory outlet.

Got it understood and then I guess Im just looking.

Yeah with revenue guided to about 1.4 billion.

On an annualized basis. It looks like you guys are well on your way to your aspiration.

2022 goal just just wondering if you had any.

Updated thoughts I mean, certainly seems like you're tracking to that kind of target, perhaps even before 2022, but.

Just as you look out.

Wi Fi I think is expected to be up high single digits. The 10% next year in that kind of environment how would you.

I'll get that aspirational goal and how close do you think you can get next year.

Good question Quinn and as we do have almost every year our intent is to update.

Our our goals long term goals as we complete our strategic planning process.

And within the next few months, we will find the right to our platform to announced our updated goals.

Great well look forward to hi, congratulations again on nice results. Thank you very much thanks Glenn.

Thank you and our next question comes from the line of Amanda.

With Citi. Your line is open. Please go ahead.

Hi, good morning.

On the data center side of the business and I, just want to clarify that I heard a comment correctly.

I think you mentioned that the datacenter business was down and partly due to capacity constrain can you just talk about how you know that business is down and if you're seeing more of an impact from demand or margin impact from capacity constraints.

And if you expect that demand or that the constraints to recover.

You know any 10 near term.

So we have more specifically about the demand part of the club the capacity part of the question.

This specific up revenue stream that goes into data centers not the hyperscale was more affected by capacity constraints related to cover 19, mainly in the Philippines factories is as I think Paul you said.

We continue to see the market continued long term to be strong.

We said, we expect in general to be at the same level going forward, while hyperscale will drop will grow at much faster rate for us.

Because of our continuing market share gain and adding more customers of Hyperscale Giants to our list of customers and that will will take job as you know a very similar to.

What we see in other capital equipment related up sales. It requires working closely with customers, whether engineers going through the qualification and evaluation and certification of at that point, we migrate into a ramp and we are right now we believe that we are practically.

In the third inning.

Our journey into Hyperscale. So we expect long term to continue to benefit from our growing presence into grow faster than the market.

Long term, there's no doubt that that the datacenter hyperscale world will grow as the use of data and the need for storage of data will continue to grow the underlying demand is very strong.

We may see fluctuations.

Mainly affected by copied 19 in general days gestation period of this very large data centers, but we are very excited about our future as a fast follower to the market from two years ago, we're getting tremendous momentum and continued to again design.

And we changed primarily because of our very advanced power density and power conversion efficiency.

Yes, that's right and I'll just note Amanda Deval said quarter to quarter, we can see we'll see a little variation just because of ground customers some of the supply issues, but that as context recall that this business is up 89% almost two times from where it was a year ago and from even late last.

Sure. So we're sustaining these much higher levels of business and expect them to continue.

Okay.

And then on the industrial and medical trying to protect net ads are you seeing any sort of increased in or speeding up rather qualification time due to cold and needing to get new products to the market.

Or was the increase that you thought in medical really due to existing things that you already had in the pipeline.

I'm not sure if we see a dramatic change in the valuation time of the of our products and medical I think we up all obviously, we show a very mixed picture recently due to the increase in.

Demand for all products for solutions at the directly related to cover 19 like respirators Org gene sequencing.

Tools.

We continue to look at the medical.

Application space as the growth engine for us.

We are benefiting from the need the current need for more.

Capacity, but we also have new design wins that go into a diagnostic and therapeutic applications that are not related to corporate 19.

To give you Logcap calibration I think we grew our marketing our up our medical revenue from 50 to 75 million. Yeah. We're about 75 hour $75 million right now and last time, we talked about who are 15, a 56 over 50 50, and we expect to continue to grow into.

Area. This is an area of investment of interest. It has all the attributes that we like to see it a target market.

Customized solution for critical applications sticky relationship with a customer and once you get designed in and qualified it becomes a long term annuity.

Great. Thank you.

Thank you and our next question comes from the line of Mehdi Hosseini list Sasquatch Susquehanna. Your line is open. Please go ahead.

Yes. Thank you for taking my question.

During the call late so I apologize.

Good question, there has already come up.

Couple of Europe.

Big picture item.

Go back to the targeted goals.

More than a billion on behalf of revenue and.

Pro forma earnings of 650, you are undervalued so you focus.

The June quarter annualized that you're not far from a target a revenue but on the as perhaps there is some catching up and that has to do with.

Additional leverage.

Is realized due to.

The cost structure is that the rubber to think about what you did how youre tracking the given these low return goals that we took from other revenue, yes, let me talk about our revenue Mehdi.

As I said earlier I think maybe you up you came late protocol.

We anticipate too.

Update.

Our long term aspirational goals within a few months after we finish our strategic planning process.

And as we said earlier multiple times in Q1, and this quarter, we're making progress really great progress towards our long term goals and I think in some aspect craft a plan. We are ahead of plan.

We are ahead of plan and the integration of our this end or ahead of plan and our growth rate.

So in mid cons to updating the out the future projection of the company, we will provide that within a few months. It about personalize the order will be dilutive on that let me just talk about the rest of the mountain Dew right we are approaching.

On a revenue side, we're getting closer but recall that our model was a fully synergized model.

And we're making great progress on synergies as I said, we basically achieved our phase one synergy goals within the first three quarters, we thought that we've taken 18 to 24 month.

But we need to achieve our phase two goals to achieve that there.

S T or to your comment so so we feel like we're in good good shape, we're actually tracking a little bit ahead of plan for seeing the benefit from faster revenue growth business as many of our markets recovered and we've grown share in data center.

That will continue to work on executing the synergy plan and driving the leverage in the business over the next several quarters driving towards those long term goals. One more comment about this maybe I wouldn't expect all are up our business evolution to be linear right. We live in a dynamic.

Environment or live in a very.

Especially now very.

Lars fluctuations related to cover 19 by the one thing we also.

We need to note as we note in our prepared comments today.

We are selectively in it and if purposefully investing more in R&D in some really really important growth engines.

That is in some times during the trajectory in developing a long term strategy, we make decisions that are related to future growth as we made a comment today, we have increased our R&D spend.

Going forward.

To address some really unique growth opportunities in the semiconductor edge that we're pursuing right now.

In collaboration with key Oems and we have decided to increase our spending in R&D.

And as I said earlier.

We're very bullish about our ability to meet our long term goals, but it may not be linear.

Sure.

It's just.

Theme how.

Your list the problems have changed on a year over year bases and now you have good problems and that leads to my follow up question.

You also shown a rebound in the net cash per share.

Right.

What are the plans for that assuming that.

That trend were to continue and then maybe maybe I'd just add one more follow up how do you see semiconductor revenue.

Into next year, assuming that memory mix would pickup and Thats, where do your sweet spot is.

And I expect continued growth, but I just would love to hear your view, so what to do with the cash and and so you should hopefully yeah. Let me start with our capital deployment, we were very opening clear about our capital deployment strategy and and we will continue we will continue.

To up to focus on.

Actively looking for additional acquisitions.

We will obviously doing a great job de leveraging our of our debt.

And we periodically review internally and with our board, whether or not we would like to do execute on opportunistic shares buyback and other it returned to shareholders.

We we have a strong de leveraging power and and cash generation power and our intent is to deploy our capital when it comes to long term.

Semiconductor a projections you know listen to our customers at Semicon West and reading. Some of you guys. As reports were very constructive about the future and we believe that long term amino twentytwenty won is is a perceived and expected to be a strong year for semi and obviously we will.

We benefited from that not only because of the fact that we will grow with the market. We continued to gain market share. We continued to cross sell embedded power products into semi we continued to increase our Sam and for that reason, we continue to focus on our mission to grow faster.

Then in market we serve.

Thank you.

Thank you and our next.

A question comes from the line.

Krishna Shankar with Cowen <unk> Company. Your line is open. Please go ahead.

Hi, Thanks for taking my question on a few of them you will really be can characterize or quantify what your market share on the semiconductor side.

Threed NAND and DRAM.

You know we.

We never will never looked at that that way and then we never dissected our market share between.

DRAM and NAND.

You know some some of our products end up.

On our customers machines.

May end up to either or logic or memory or DRAM and NAND not always we know exactly what the what what the target application is within the fab. So I don't believe we have that.

Got it got noise and then.

On the data centers side of your revenues.

There is little bit to characterize what percentage. If you did this into that leads from hyperscale.

I don't do it we don't Kevin we havent broken that out.

At this point Krish.

Alright noted when there's just a final question for you all know when you look at.

Hyperscale them.

Good some of the telecom you're quoting side you know my understanding is that.

No most of them are like kind of going towards like 48 ruled on the coupon side you actually see the project merging down the road between hyper PLM.

Or do you think thats going to be a distinct difference between the two.

We see some talks about cross pollination right now from our perspective, we are excited and focus on the migration.

40 at bowls in.

In datacenter Hyperscale and we bring to the table unique.

Tactical advantage that came with their the artisan innovation and engineering teams more specifically related to a power conversion efficiency and power density, which means basically you can increase the power.

Without dramatically increase your footprint or your volume of the box and that that means our density.

Related to that you know the ability to go to market quickly with innovative and leading solutions.

As a time to market plays an important role here and as as we go from a fast follower into a leader and enable customers with time to market. We also believe that our margins will improve.

[music].

Got it thank you bill.

Thank you.

Thank you and our next question comes from the line of powerful much mom.

With Raymond James Your line is open. Please go ahead.

Thanks for taking the question.

It is kind of a core key regulatory issue now that Hong Kong is no longer.

Kind of treated independently under your slaw for for trade purposes. I'm curious if you have any customers in Hong Kong or purchasing through Hong Kong that may be affected by the technology transfer restrictions.

Yeah, we don't have any large customers that we service out of Hong Kong, obviously, we have operations there.

There are transaction that flow through there, we don't see any change or impact to us.

As a result at the recent changes from an day to day or transaction activity.

Understood. Okay. That's good to hear on and then a balance sheet question, you're continuing to pay down.

Pretty modest amount $4.4 million of debt per quarter, but obviously you have 380 of cash on the balance sheet is there any rationale for accelerating the debt pay down since that is one of your stated goals for capital allocation.

Yeah, It's a really good question about and as you've seen we have brought that down modestly our view as the environment has changed with the lower interest rate and frankly, our ability to lock in extremely favorable financing on is that we don't anticipate bringing that debt downgrade.

Quickly, we'll see how interest rates go but as you recall.

With the swap we put in place earlier in Q2, our net cost our total cost of debt is around 1.25%.

Or lower so.

Thats on in that in that rate environment, we don't see really an advantage to accelerating the debt paid back beyond.

A modest amounts we've been doing.

Okay, and then just a quick one on.

Your geographic sales mix Latin America, right now stands out as the.

The hardest hit global region from the pandemic.

And I'm curious why exposure if any you have to customers kind of Mexico, and South America region.

Certainly South America, I'd say, it's quite small there is some mostly from embedded power products and Mexico, There's certainly some exposure.

Because we have customers that have.

For embedded tower that have operations in Mexico.

And our but all in with the our smallest.

Of our various regions.

Okay.

Thank you very much guys.

Thank you.

Thank you and I'm showing no further questions and I would like to turn the conference back over to evolve cost and then for any further remarks.

Thanks, everybody for joining us today, we had a great quarter. Despite of covered 19, we continued to outperform and up and.

Do better on the short term and long term plans excited about a projection of the company in the future of the company and I'm looking forward to talking to many of you during the quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.

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Good day, ladies and gentlemen, and thank you for standing by welcome to advance Energy's second quarter 2020, <unk> earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need a press star one on your telephone please.

Be advised to today's conference maybe recorded.

Like true if you require any further assistance. Please press star then see real I would now like to have the conference over to one year speakers to eight Edwin Mok, Vice President of strategic marketing and Investor Relations. Sir. Please go ahead.

Thank you Michelle good morning, everyone welcome to advance energy second quarter, what's stopping 20 earnings conference call.

With me today, all you all Watson Oh CEO.

Yeah.

Brian Smith director of Investor Relations.

Do you have not seen <unk> earnings press release, you can find on our website.

I always thought about <unk> dot com.

Yeah, you always they'll find a slide presentation all discussion today.

Before I begin I like to mention Todd Anthony will be participating [laughter] multiple investor conferences in the coming months as events occur we'll make that announcement.

So that really no remind you would that today's call contains forward looking statement, that's subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance.

Information concerning the risks and uncertainties, it's found no filings FCC.

All forward looking statements are based on management's estimates projections assumptions.

Today August <unk> 2020, and the company assumes no obligation to update them.

Long term targets presented today, what do you flu outbreak sunocos and the integration targets should not be interpret in any respect that guidance.

On today's call all financial result will be presented on a non-GAAP financial basis, unless otherwise specified.

Any explanation an explanation about non-GAAP financial measures Haswell.

Reconciliation between GAAP and non-GAAP measures can be found in our press release today.

With that let me call pasta quality, all the CEO Yuval Wasserman.

Okay.

Thank you Edwin good morning, everyone and thank you for joining us on the school.

This was a good quarter fourth branch energy.

Strong demand across several of our markets and solid execution, which enabled us to the LIBOR financial results.

At or above the high end of our expectations.

In the continued challenging about it.

The strength demand is fueled by multiple technology trends, that's driving the data economy in the fourth industrial Revolution that result in an acceleration in adoption Jacoby 19.

In line with our growth and diversification strategy. The acquisition of partition has expanded our exposure to these trends and vertical.

And we are ahead of plan in driving the integration of the combined company in achieving our switch synergy goals.

Oh pure play power strategy focus.

In an integrated functional organization.

Bite us with the synergy operational excellence and capabilities, which allowed us to score to the LIBOR sequential growth.

<unk> well for a whole market better to go.

Resulting in revenue, what we handed a $40 million.

We generated non-GAAP bps, if $1.18 cents above our guided range.

Our highest operating cash flow in two years.

In the midst of the current global pandemic, we continue to put the safety and help a private Louise and our communities first.

We ended the second quarter all of our major manufacturing sites had returned to a near full capacity.

Operating with enhanced safety protocols, and physical separation that are above and beyond local government requirements.

Our supply chain continues to improve but we still see some bottlenecks that if we acquire proactive action to mended shortages and on time delivery of raw materials.

Well, the increasing global cases of copied 19. They involvement is very dynamic and unpredictable and our results may continue to be impacted more by operating conditions in capacity, then but on the buy underlying demand demand.

Turning now to our market share performance.

Demand from the semiconductor market rule once again in the second quarter.

Driven by continued strength in foundry logic applications and improved demand for memory applications, particularly in NAND on that transition to hire on their accounts.

Since switching they cyclical trough in the second quarter of 2019, our sales into the semiconductor markets grew by 61% year over year, outpacing Wi Fi and our peers.

This strong performance confirms our market share gains the increased power content in leading edge applications.

Stendal product portfolio and the normalization of customers inventories.

With memory investment in this cycle remaining well below the last we believed that we're well positioned to continue to outgrow the industry when memory investments resumed.

Looking into the third quarter, we expect or sales into the semiconductor market to continue to grow.

As the leading innovator in semi power solutions, we continue to Delever groundbreaking technologies and products to enable our customers innovation.

At the recent Semicon West we entered the spring no process bar products, and a new configurable embedded possibly.

The process bar products are being evaluated by multiple customers for Eylea Eylea advanced conductor etch and PCB de blasio for leading edge logic and memory devices.

They visit power supply HP is the latest up our broad portfolio of Configurable bias or buys in is a high power multi outputs system that can be used for multiple auxiliary power applications in both front end and Bakken tools.

We expect suspect successful evaluation of this product to drive additional cross selling revenue and expand our addressable market within savvy.

Beyond move products are leaving technology continued to generate new design wins in market share gain.

Design wins, we announced previously have resulted in RF match revenue in Q2.

That is almost doubled year over year.

In addition, recently we shipped several units of our all most advanced triple frequency navigator are matching network.

Our focused efforts to being remote plasma sources continue to drive growth each quarter is our superior process performance in long chamber lifetime resonate with customers.

Finally, we shouldn't design wins in etch and Dryclean applications continued to strengthen our position as Korean Oems.

Industrial and medical markets revenue grew sequentially driven by strong demand in medical applications improve ability to deliver products from our ramping factories in initial recovery from the product transition by a large customer we discussed in Q1.

Well, we sequentially macro weakness exacerbated by copied 19 continues to limit the overall industrial market.

Within this environment Judo was one of our strongest quarters for medical products is very strong demand for coverage related critical care and medical applications more than offset we can demand elected in cosmetics procedures. In addition, we won multiple new designs for applications ranging from.

DNA sequencing and mobile X Ray just surgical microscopes.

Looking forward to fuel, we expect revenue in the industrial and medical verticals to grow sequentially supported by ongoing demand in medical.

Production capacity.

Revenue in our datacenter computing market was down slightly from record levels last quarter with continued sequential growth in hyperscale offset by lower enterprise computing revenue due to supply constraints overall datacenter computing grew 89% year over.

A year on a pro forma basis, and Hyperscale was up more than five ex over last year's performer level due primarily to our market share gains.

In addition, we began shipping production units to a third major hyperscale customer this year as we secured a leading position in its common data center platform.

With a third major hyperscale customer, we remain confident and believe that the second half of Twentytwenty rebel in datacenter computing will remain closed to the robust levels seen in the first half assuming our manufacturing capacity is not affected by future waves of 19.

Oh CP virtual summit in May we launch our next generation power shell, which is designed to support the data center.

Infrastructure migration to 48 volt, we have seen increased interest in a partial solutions from a widening group of datacenter customers ranging from gaming and retail to consumer Internet and international cloud service providers.

With growing demand for artificial intelligence applications.

Data center racks are projected to consume up to seven times more power than traditional data set to Rex we believe our industry, leading power conversion efficiency in our continuing innovation in data Center rack power architecture will both drive a growth in play a critical role in.

Helping to industry reduce electricity consumption.

Beyond Datacenters, our industry, leading power efficiency and power density would be important enablers for improving energy sustainability across many industries recently at Semicon West our customers applied materials announced its success 23 30 initiative advanced energy is one of this.

Six strategic partners working with applied towards a more sustainable supply chain.

Advancing our energy efficient products and Orient fundamentally efficient operations, we are adhering to our commitment to sustainability leadership.

Finally.

Demand from our telecom and networking markets increased from the first quarter as these markets appear to be reaching a bottom. In addition revenues revenues in the second quarter benefited from high volume shipments of several prior design wins across multiple customers.

While investment that was global telecom infrastructure continued to be delayed by copied 19, and geopolitical tension strong demand for data center networking is generating increased sales for our products. During the quarter. We will next generation interconnect route that design due to our industry leading power density.

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Looking into the third quarter, we expect to see revenue maintained around these levels long term global deployment of Fiveg infrastructure will drive new requirements for more advanced power systems.

To summarize.

Our operational excellence in execution allowed us to capitalize on strong demand from our customers and increased revenue.

As a pure play power leader, we grew our market leadership introduced innovative new products and realize the synergistic benefits of the odd percent acquisition.

Well covered 19 is still effecting macroeconomic and operating conditions. This price is also accelerating the adoption of the technologies behind the fourth industrial revolution, potentially increasing the long term organic growth rate core markets.

Overall, we're executing our strategic plan to grow faster than our markets into accelerate earnings growth and we are making good progress towards achieving our long term aspirational goals over one half billion dollars in revenue over six and a half dollars non-GAAP EPS and over 23.

8%, Oh I see.

I'd like to thank our customers shareholders partners and our valued employees for your support, especially during this challenging times I look forward to speaking with many of you any upcoming quarter with that let me turn the call over to Paul Paul.

Thank you you have all and good morning, everyone.

Before I begin. Please note that all financial measures presented today will be on a non-GAAP basis, unless otherwise stated.

Excluded from non-GAAP results, our amortization stock compensation integration and transition costs unrealized foreign exchange gains and losses and restructuring items.

This quarter, we recorded 5.8 million in restructuring costs related to the transition of manufacturing from Shenzen to Malaysia and.

And other actions associated with synergies related to the artist and acquisition.

We also recorded 1.1 million in noncash unrealized FX losses related to long term lease and pension liabilities.

A full reconciliation from GAAP non-GAAP measures can be found in our press release issued earlier today.

And our second quarter, we delivered outstanding financial results exceeding expectations and guidance for revenue gross margin operating margin and cash flow generation.

Team's strong execution in the challenging environment enabled our non-GAAP EPS be above our widened range and our annualized return on invested capital to increase to over 20%.

Cash increased by $28 million and regenerated additional synergies from the integration of artisan.

Second quarter revenue was a record 340 million up 7.7% from 315 million last quarter and up 152% from 135 million a year ago.

On a pro forma basis, including a full quarter of artists and revenue in prior periods.

Q2 revenue grew 24% year over year with strong growth in semiconductor and data center computing markets, partially offset by declines in industrial medical and telecom and networking.

Excluding or artisan organic revenue grew 11.5% sequentially and 34% year over year to $180 million.

Turning to revenue by market sales in semiconductor in Q2, or 145 million up nearly 9% from the strong first quarter and up 61% year over year.

On an organic basis. So many semi revenue grew 60% year over year with strong demand from foundry logic and higher investment in NAND memory.

Semi product sales were up over 9% sequentially and 88% year over year.

Semi service revenue also grew about 9% from last quarter, but declined 8% from last year due to covert 19 related capacity constraints in some of our service centers.

Overall, our semiconductor revenues have grown faster than.

WFP and that the vast majority of our peers, both year to date and year over year in Q2.

Revenue from our industrial and medical markets was 71 million up 14% sequentially. As a result of growth related to critical care medical devices increased stem cell market demand and our improved ability to deliver products.

On a pro forma basis revenue declined 23% year over year, driven by general macro weakness in several of our industrial sectors exacerbated by the code 19 crisis.

Datacenter computing revenue was 83 million down 3% from the exceptionally strong first quarter, but up 89% year over year on a pro forma basis Hyperscale continued to grow offset by lower enterprise revenues, mainly due to capacity constraints in the Philippines facility.

Telecom and networking revenue was $40 million up nearly 20% sequentially on solid shipments of our design wins.

On a pro forma basis revenues declined almost 14% year over year as a global telecom infrastructure investment continued to be impacted by the pandemic.

Non-GAAP gross margin for the quarter expanded almost a 100 basis points sequentially to 38.7%.

Margins benefited from substantially better than expected product mix and material cost.

And positive other cost of sale items, partially offset by increased costs related to coven.

In addition, we improved factory utilization overall and are beginning to see the impact of some of our synergy actions.

Although we do not expect all of these favorable items to repeat next quarter, we continue to make steady progress on our goal to improve overall gross margins greater than 40%.

Non-GAAP operating expenses were 77.8 million up 3 million from last quarter, primarily related to increased R&D investments and variable expenses associated with the higher revenues.

Expense as a percent of sales improved almost a 100 basis points, demonstrating the synergy and leverage in our model and the honored at under 23% of sales is in the top quartile of our competitors, even as we continue to make critical investments to drive growth.

Non-GAAP operating income improved to 53.8 million and 15.8% of revenue.

Non-GAAP other expense was approximately $500000 down from 3.5 million last quarter, primarily on the timing of an insurance claim and subsequent recovery and on lower net interest expense.

We expect total other expense to be in the one to one and a half million dollars range going forward.

Our non-GAAP tax expense was $7.9 million or 14.7%, primarily as a result, and integrating artisan into our structure and favorable mix of foreign earnings.

Looking forward, we expect the GAAP and non-GAAP tax rate to remain around 15% to 17%.

Non-GAAP earnings for the quarter was $1.18 per share up 30% from 91 cents last quarter on higher revenue and margins.

EPS was up over 150% from 45 cents a year ago.

The artist acquisition continues to contribute potter positively to our consolidated results.

Acquisition was solidly accretive in Q2, adding over 30 cents per share to non-GAAP earnings, including the interest expense of financing.

And is at the end of Q2 realized synergies today, we're over $20 million.

As a result, we have largely achieved our phase one synergy goals. After the first three quarters well ahead of our original plan 18 to 24 months.

As we integrate artisan we have found new opportunities to further improve our cost, allowing us to reinvest part of the achieve synergies into R&D to drive faster long term growth, while keeping our long term operating margin goal of over 20%.

Based on the Great progress we have made we remain confident in meeting or exceeding our long term targets, a $40 million of annualized synergies and $1.50 per share in EPS accretion.

Turning now to the balance sheet.

We ended the quarter with cash and marketable securities of 383 million up 28 million from Q1.

Operating cash flow from continuing operations was $38.6 million, our highest level since Q2 2018.

Receivables increased on higher sales and DSL rose by one day to 62 days.

Inventory increased by $25 million and turns were 3.2 times, reflecting investments we made to manage risk in the coven environment.

Payables were 180 million, representing 77 days of the IPO.

Total days of networking capital were 97 up six days from last quarter.

Capital expenditures for the quarter were 7.3 million and depreciation was 6.6 million.

During the quarter, we repaid 4.4 million of debt and ended with total bank debt of $331 million, resulting in gross debt leverage of 1.8 times.

We did not repurchased any shares during the quarter.

Now, let me turn the guidance.

In the near term, we continue to see strong demand in our semiconductor market and anticipate continued modest improvement in industrial and medical.

We expect demand in the data center computing, and telecom and networking markets to fluctuate at around the current levels.

However, we continue to see changes in the environment related to cope with 19 as many many governments re implement certain levels of quarantine.

Factoring in the limited visibility and ongoing operating and macroeconomic risk related to coveted we're guiding Q3 revenue to $350 million plus or minus 25 million.

Based on anticipated mix volume and ongoing cope and related costs, we expect non-GAAP gross margins to be in the 37% to 38% range.

The 150 basis points from last quarter's guidance as we gain more traction on our synergy and structural improvements.

Operating expenses are expected to be about flat, including increased engineering investment related to a new advanced electric etch evaluation program with the strategic OEM.

As a result, we expect non-GAAP earnings at $1.15 per share plus or minus 25 cents.

To summarize we delivered a great quarter operationally and financially with record revenues improvement in gross margin and operating margins and almost 30% sequential increase to our non-GAAP earnings.

Our pure play power strategy is enabling us to capitalize on market and technology trends across many of our verticals accelerate growth and realized synergy and operating benefits ahead of our plan.

We are well underway to building the business and financial model at the top tier industrial technology company.

And we are on track to meeting or exceeding our stated long term aspiration of goals.

With that we will take your questions operator.

Thank you, ladies and gentlemen of your other question at this time. Please press star one on your telephone if your question and answer I wish to remove yourself from the Kim. Please press the tamke prevent any background noise. We ask that you. Please raise your line on mute. Once your question has been stated.

First question comes from the line of Tom just leave with D.A. Davidson. Your line is open. Please go ahead.

Yes. Good morning. Thank you for taking my question. So first I'm curious as we ramp up the semiconductor business right. Now you mentioned, obviously, a combination of markets and share gains and I'm curious are you seeing the beginnings of an inventory increase at your customers yet or is that still to come.

I can't comment that I don't think we have enough visibility to report on our customers' inventory.

We expect I'm sorry.

Say that through the cycle typically when targets, let off the Olympics slowdown, but then you outgrow the market because both your end markets go up faster and also the build in the channel.

So maybe not specifically for customers, but just in general are you seeing a build and youre tools in the marketplace from an inventory point of view.

Yes, Tom as you all said, it's hard for us that exact visibility to our customers, but I can say that we continued to see steady Paul our been sizes are levels aren't really changing so we're not seeing increasing inventory in the Ben.

And our sense is our customers are consuming inventory at the rate. We're shifting it yeah, we don't see any of normal behavior its own and art demand continued to be strong.

And.

We're very constructive towards Q3 and shipping.

Great and then Paul when you look at the new products.

What do you think the impact will be on margins over time as they start to become.

Mark accepted in the marketplace.

Well generally our new products have more innovation more capability.

Let me more more power accuracy and as a result, we expect to sustain or grow our margins with our with our new products as we've done historically.

Another comment related to that Tom.

As we develop new products.

We rely on a future combine operation organization and platform is a combination of the traditional AG in the orthos and very efficient operation.

So we expect to benefit.

From.

A much more efficient manufacturing and lower cost manufacturing for a future products.

Some of these products will be vertically integrated.

And of course, as we transition the product portfolio and complete the synergy enact activities with ours and all of these things will contribute overall to our ability to continue to drive gross margins higher and above our goal at 40%.

Okay, and then finally breaking rate rubber store that.

Okay and finally, Paul you mentioned that there were some supply constraints. It seemed like there was more centered around the datacenter business I just wonder if you can explain why hit that.

Segment of your market more than the rest.

Yeah, I think as you look at at this point, our factories are largely up and running but we still have point issues with supply.

You noticed our inventory was also up this quarter part of that was an effort to make sure we had adequate supply to meet our customer needs, but you still need a full kit to ship products and a net and then in this case.

That particular market in a few products there were were impacted the most by supply constraints in the factory and and material.

Okay. Thanks for your time.

Thank you.

Thank you and our next question comes from the line of Quinn Bolton with Needham and company. Your line is open. Please go ahead.

Hey, guys Thats, a nice sharpen the results and the guidance Paul I guess I'm scratching my head a little bit on the gross margin guidance. I know you guys had a much stronger gross margin the second quarter.

When I look at the revenue mix shift in Q3, it sounds like.

Semiconductor, which is your highest gross margin.

Business is going to be growing the fastest so and overall revenue was up so you should get better absorption in the factories I'm just trying to understand why margin could be down 120 basis points at the midpoint.

Yeah. It's a good question Quinn this quarter as I explained we have pretty much everything go right. Obviously, we had combing the costs, which which were unfavorable that week, but that continues so as we look forward. We just don't see all of those things continuing to fall to the credit to the Rightside and although.

70 is up our mix within our overall product.

Our folio into different product categories has as much impact as just one market or another and so on balance when we look at the operating activities in the third quarter.

We do see margins down a little bit I'll also note that while our factories are largely up and running we are focused on reducing inventory and we had inventory position into hubs in other areas, which we expect to drawdown, which is part of the revenue increase in Q.

Q3, not necessarily all higher factory outlet.

Got it understood and then I guess.

Just looking.

Yes with revenue guided to about 1.4 billion.

On an annualized basis. It looks like you guys are well on your way to your aspiration.

22 goal just just wondering if you had any.

Updated thoughts I mean, certainly seems like you're tracking to that kind of target, perhaps even before 2022, but.

Just just.

Look out.

See I think is expected to be up high single digits, the 10% next year and in that kind of environment how would you.

Look at that aspiration, all goal and how close do you think you can get next year.

Good question Quinn and as we do almost every year.

Our intent is to update.

Our goal is long term goals as we complete our strategic planning process.

Within the next few months, we will find to rightsize platform to announced our updated goals.

Great and we'll look forward to it.

Congratulations again on nice results. Thank you very much thanks Glenn.

Thank you and our next question comes from the line of Amanda.

Citi. Your line is open. Please go ahead.

Hi, good morning.

On the data center side of the business and I just wanted to clarify that I heard a comment correctly.

I think you mentioned that the datacenter business is down and partly due to capacity constraint can you just talk about how.

Ladies and gentlemen, if you're seeing more of an impact from demand or more of an impact from capacity constraints.

If you expect that to that are that the constraints to recover.

Any timing retirement.

So we.

More specifically about the demand part of the big capacity part of the question.

This specific.

Revenue stream that goes into data centers not the hyperscale was more affected by capacity constraints related to cover 19, mainly in the Philippines factories as as I think Paul you said.

We continue to see the market continued long term to be strong.

We said, we expect in general to be at the same level going forward, while hyperscale will drop will grow at much faster rate for us.

Because of our continuing market share gain and adding more customers of Hyperscale Giants to our list of customers and that will well to take up as you know at very similar to.

What we see in other capital.

Equipment related sales into acquirers working closely with customers, whether engineers going through the qualification and evaluation and certification of at that point, we migrate into a ramp and we are right. Now we believe that we are practically in the third inning.

Our journey into Hyperscale. So we expect long term to continue to benefit from our growing presence into grow faster than the market.

Long term, there's no doubt that that the datacenter hyperscale world.

The ROE as the use of data and the need for storage of data well continue to grow the underlying demand is very strong.

We may see fluctuations.

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Mainly affected by copied 19 in general base gestation period of this very large data centers, but we are very excited about our future as a fast follower to the market from two years ago, we're getting tremendous momentum and continued to again design wins.

Maybe only because of our very advanced power density and power conversion efficiency.

Yes, Thats right and.

I'll just note Amanda Deval said quarter to quarter, we can see well see a little variation just because of ground customers some of the supply issues, but that as context recall that this business is up 89% almost two times from where it was a year ago and from even late last year. So we're sustaining these much higher levels.

Business and expect them to continue.

Okay.

And then on the industrial and medical side at the took now or are you seeing any sort of increased and or speeding up rather qualification time due to cold and needing to get new products to the market or was the increase that you thought in medical really due to existing things that you already had in the pipeline.

I'm not sure if we see a dramatic change in the valuation time of the.

Our products and medical.

I think we all obviously, we so a very mixed picture recently due to the increase in.

Demand for all products for solutions that they are directly related to cover 19 like respirators Org gene sequencing.

Tools.

We continue to look at the medical.

Application space as the growth engine for us.

We are benefiting from the need the current need for more.

Capacity, but we also have new design wins that go into a diagnostic and therapeutic applications that are not related to club at 19.

To give you Logcap calibration I think we grew our marketing our up our medical revenue from 50 to 75 million. Yeah. We're about 75 hour $75 million right now and last time, we talked a budget or 50 50.

The over 50, and we expect to continue to grow in this area. This is an area of investment of interest. It has all the attributes that we like to see the target market.

Customized solution for critical applications sticky relationship with a customer and once you get designed in and qualified it becomes a long term annuity.

Great. Thank you.

Thank you and our next question comes from the line of Mehdi Hosseini list.

Susquehanna. Your line is open. Please go ahead.

Yes. Thank you for taking my question.

During the call late so I apologize.

I think question to has already come up.

A couple of.

The picture item.

Go back to the targeted goals.

More than a billion and a half both revenue and.

Pro forma earnings of 650, you are undervalued.

And your June quarter annualized that you're not far from a target a revenue, but under as perhaps there is some catching up and that has to do.

Additional leverage.

It is realized due to.

The cost structure is that their right to think about what you did better than how youre tracking against these long term growth that we took another revenue yes, let me talk about the revenue and may be.

As I said earlier I think maybe you up you came late that of hall.

Oh, we anticipate to.

Update.

Our long term aspirational goals within a few months after we finish our strategic planning process.

And as we said earlier multiple times in Q1, and this quarter, we're making progress really great progress towards our long term goals and I think in some aspects to plan. We are ahead of plan.

We are ahead of plan and the integration of far this in or ahead of plan and that growth rate.

So in many times to updating the out the future projection of the company, we will provide that within a few months. It about correspond you want to.

On that let me just talk about the rest of the market you're right we are approaching.

On a revenue side, we're getting closer recall that our model wasn't fully synergized model.

We're making great progress on synergies.

As I said, we basically achieved our phase one synergy goals within the first three quarters, we thought that would take 18 to 24 month.

But we need to achieve our phase two goals to achieve that they're S T or to your comment. So so we feel like we're in good shape, where actually tracking a little bit ahead of plan. We're seeing the benefit from faster revenue growth is as many of our markets have recovered and we've grown share in data center.

We'll continue to.

Work on executing that synergy plan and driving the leverage in the business over the next several quarters driving towards those long term goals. One more comment about this may be I wouldn't expect all Rob our business evolution to be a linear right. We live in the dynamic environment related and very.

Especially now very.

Largest fluctuations related to cover 19, but the one thing we also.

I need to note as we noted in our prepared comments today.

We are selectively and if purposefully investing more in R&D in some really really important growth engines.

That is in some times during the trajectory in developing our long term strategy, we make decisions that.

Our related to future growth as we made a comment today.

We have increased our R&D spend.

Going forward.

To address some really unique growth opportunities in the semiconductor edge that we're pursuing right now.

In collaboration with key Oems and we have decided to increase our spending in R&D.

And as I said earlier.

We're very bullish about our ability to meet our long term goals, but it may not be linear.

Sure.

It is just.

Seeing how.

Your list the problems have changed on the year over year bases and now you have good problems and that leads to my follow up question.

We're also shown a rebound and then net cash per share.

Right.

Well the plans for that assuming that.

That trend were to continue and then maybe maybe I just.

One more follow ups, how do you see semiconductor.

New.

Into next year, assuming that memory mix would pickup and Thats, where do your sweet spot is.

And I expect continued growth, but I just would love to hear your so what to do with the cash and.

So.

Yeah, let me start with our capital deployment.

We were very open unclear about our capital deployment strategy and we will continue we will continue to to focus on.

Actively looking for additional acquisitions.

We will obviously doing a great job de leveraging our of our debt.

And we periodically review internally and with our board, whether or not we would like to do execute on opportunistic share buyback and other it returned to shareholders.

We we have the strong de leveraging power and cash generation power and our intent is to deploy our capital when it comes to long term.

Semiconductor projections.

Listen to our customers at Semicon West and reading some of you guys. As reports were very constructive about the future and we believe that long term.

You know Twentytwenty won is perceived and expected to be a strong year for semi and obviously, we will be a benefited from that not only because of the fact that we will grow with the market or we continued to gain market share. We continued to cross sell embedded power products into semi we continue.

To increase our Sam and for that reason, we continue to focus on our mission to grow faster than market we serve.

Thank you.

Thank you and our next.

A question comes from the line of.

Curse Shankar with Cowen <unk> Company. Your line is open. Please go ahead.

Hi, Thanks for taking my question on a few of them you all.

There will be can characterize or quantify what your market share on the semiconductor side.

Threed NAND and DRAM.

You know, we [laughter], we never whenever I looked at that that way and we never dissected the our market share between.

DRAM and NAND.

You know some some of our products end up.

On our customers machines.

May end up to either or logic or memory or DRAM and NAND.

Not always we know exactly what the what would the target application is within the fab. So I don't believe we have that.

Got it no choice and then.

On the data centers side of your revenues.

It really be too.

What percentage if you did this into the mix from Hyperscale.

I don't do we don't Kevin we haven't broken that out.

At this point Krish.

Well it nobody but then just a final question for you all know when you look at.

Hyperscale and.

The gets a little bit telecom networking side, you know my understanding is that.

Most of them are like kind of going towards like 48 ruled on the coupon side, you actually see the products merging down the road between hyper PLM telecom or do you think thats been going to be a distinct difference between the two.

We see some talks about cross pollination right now from our perspective.

We are excited and focus on the migration.

40 at Vols in datacenter Hyperscale, and we bring to the table unique.

Technical advantage that came with their fee artisan innovation and engineering teams more specifically related to a power conversion efficiency and power density, which means basically you can increase the power.

Without dramatically increase your footprint or your volume of the box and that that means our density.

Related to that the ability to go to market quickly with innovative and leading solutions.

As a time to market plays an important role here and as as we go from a fast follower into the leader.

And enable customers with time to market. We also believe that our margins will improve.

Got it thank you bill.

Thank you.

Thank you and our next question comes from the line of powerful much mom.

Raymond James Your line is open. Please go ahead.

Thanks for taking the question.

End of a core key regulatory issue now that Hong Kong is no longer.

Kind of treated independently under your slaw for for trade purposes.

Curious if you have any customers in Hong Kong or purchasing through Hong Kong that may be affected by the technology transfer restrictions.

Yeah, we don't have any large customers that we service out of Hong Kong I'm, obviously, we have operations there.

There are transactions that flow through there, but we don't see any change or impact to us.

As a result at the recent changes from a day to day or transaction activity.

Understood. Okay. That's good to hear on and then a balance sheet question, you're continuing to pay down.

Pretty modest amount $4.4 million of of debt per quarter, but obviously you have 380 of cash on the balance sheet is there any rationale for accelerating the debt pay down since that is one of your stated goals for capital allocation.

Yeah, It's a really good question about and as you've seen we have brought that down modestly our view as the environment has changed with the lower interest rate and frankly, our ability to lock in extremely favorable financing.

Is that we don't anticipate bringing that debt down very quickly, we'll see how interest rates go up and as you recall.

With the swap we put in place earlier in Q2, our net cost our total cost of debt is around 1.25% or lower so.

Thats.

In that in that rate environment, we don't see really an advantage to accelerating the debt paid back beyond the modest amounts we've been doing.

Okay and then just.

Quick question on.

Your geographic sales mix Latin America, right now stands out as.

The hardest hit global reach and from the pandemic.

And I'm curious why exposure if any you have to customers kind of Mexico, and South America region.

Certainly South America, I'd say, it's quite small there is some mostly from embedded power products and Mexico, There's certainly some exposure.

Because we have customers that have.

For embedded tower that have operations in Mexico.

At all but all in it would be our smallest.

Our various regions.

Okay.

Thanks, very much guys.

Thank you.

Thank you and I'm showing no further questions and I would like to turn the conference back over to evolve cost women for any further remarks.

Thanks, everybody for joining us today, we had a great quarter. Despite of covered 19, we've continued to outperform and up and.

Do better on the short term and long term plans excited about a projection of the company and a future if a company and I'm looking forward to talking to many of you during the quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.