Q3 2020 Advanced Energy Industries Inc Earnings Call
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Press Star Zero I would now like to hand, the conference over to your speaker today Mr. Edwin Mok.
Vice President of strategic marketing and Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, good morning, everyone welcome to events Energy's third quarter 2020 earnings conference call.
Read today, all you've all Wasserman, President and CEO, Paul Oldham, Our executive Vice President and CFO and Brian Smith Director of Investor Relations if.
If you have not seen our earnings press release, you can find it on our website that I always thought at times and if you got home.
You'll also find the slide presentation to follow along all discussions day before.
Before I begin I would like to mention that he will be hosting a virtual investor event on Monday December 14th.
We welcome all of you to join US at this event. In addition, we will be participating on multiple investor conferences in the coming months as events occur we will make the announcements.
Let me remind you that today's call contains forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance.
Information concerning these risks and uncertainties is found in our filings with the SEC. All forward looking statements are based on management's estimates projections assumptions as of today November five 2020.
And the company assumes no obligation to update them.
Long term targets presented today, which include our aspirational goals and Intuiship gration targets should not be interpreted EPS guidance.
On today's call I'll financial result will be presented on a non-GAAP financial basis, unless otherwise specified.
An explanation of our non-GAAP financial measures as well as reconciliations between GAAP and non-GAAP measures can be found in today's press release.
With that let me pass the call Charles CEO Yuval Wasserman Yuval.
Thank you Ed and good.
Good morning, everyone and thank you for joining us on this call.
Overall this was an outstanding quarter for attention energy with record revenues earnings and operating cash flow.
We delivered sequential revenue growth across all of our markets verticals and recorded new quarterly highs in semiconductor data center computing and service.
Good operating leverage and continued execution on our synergy goals resulted in gross margins approaching 40% and non-GAAP earnings per share up over three extra last year, validating our financial model and demonstrating our ability to accelerate earnings growth.
Overall demand for our products continued to be strong driven by ongoing investment in technologies associated with the data economy, great execution by our operations and supply chain teams enabled us to catch up on coffee related delays and respond to the burst of demand.
During the quarter, we continued to ramp our Malaysia factory, which is next to one of our leading customers.
As we integrate and optimize our global operational footprint. It provides us with business continuity and resiliency in meeting our customers' demand in a dynamic operating environment. In addition, we continue to execute on our integration plans delivering synergies and record accretion from or are there.
Mhm acquisition, we expect additional synergies to be realized through Twentytwenty, one as we execute structural changes in ordering a fracturing and supply chain.
Beyond cost synergies, we have started to securing new cross selling design wins across both semiconductor and industrial end markets and we expect those means to drive incremental revenues in Twentytwenty one.
We continue to invest aggressively in R&D, which enabled us to win multiple design wins across all markets into launched six new products across different portfolios during the quarter.
These new wins and new offerings are expected to generate continued growth for AG going forward turning.
Turning now to our products and performance by market.
As I mentioned semi revenue was a quarterly record growing nearly 15% sequentially and over 70% from last year as we continue to meaningfully outperformed the market and our semi peers.
Service revenue also reached record high driven by improved fab utilization across multiple reason and strong demand for upgrades and retrofits. We believe process power has become one of the fastest growing subsistence segments within the semi equipment supply chain as the market leader.
With the broadest product portfolio and market and customer exposure, we are gaining market share with design wins from any critical processes.
The combination of strong market growth and our share gains are driving or similar revenue to go faster than all of our semi peers in 2020 four.
For example.
For example, in industrial demand for consumer electronics coating and motion control applications improved right.
Revenues from medical applications remains strong driven by continuing demand for critical care applications.
Non critical care applications also began to improve but remained well below pre covered levels.
This quarter, we secured multiple design wins across a wide range of medical diagnostic imaging and therapeutic applications.
Of note.
Below the market.
Demand from enterprise OEM customers recovered in Q3, partially due to our ability to deliver to customer needs and capture market share. In addition, one of our proud of design wins into high performance computing platform started to rain, we expect H b C to be a secular dry.
<unk> for a business going forward given that our industry, leading product power density is the ideal solution for meeting the high power high density requirements for those server racks.
<unk> are expected to come in around these levels is market signals remain mix.
Long-term our efforts and winning five G. A next generation networking designs prepare us to capture the market's recovery is global infrastructure investment accelerates.
In summary are cute three results serves a clear validation of our strategy and our business model.
This strategies enable us to deliver industry leadership revenue growth innovation synergies and earnings I'm extremely proud of our global team who responded to the myriad challenges this year to deliver outstanding financial and operational results, while ensuring a safe environment for.
Employees.
I would also like to welcome a new to new board members and they'll cento and the Nisha mimics who add complimentary industrial market knowledge experience and capability to our board.
As we continue to deliver on our strategic goals.
We are realizing our vision of being a leading industrial growth company.
With a diversified revenue base strong growth libraries, and top tier financial results.
As we look forward near term, we see increased risks due to the new waves of Corona virus, but longer term. We see 2021 is setting up to be a growth year for AE, although we see some variations quarter to quarter, we expect to continue to grow earnings driven by our momentum and semi sure.
The record result across a wide range of financial metrics.
Strong execution by our team to meet our customer requirements and increased demand for our products enabled revenue and EPS to surpass the high end of our guidance ranges.
In addition, we achieve an annualized return on invested capital of over 25%.
And our cash balance increased by over $48 million.
Perhaps most significantly our financial performance validates our business model and demonstrates the leveraging our operation as we execute our strategy to accelerate earnings growth.
Quarter revenue was a record $390 million up 15% from $340 million last quarter, and 122% from a year ago.
We saw sequentially stronger demand across all our markets and a burst of order activity at the end of the quarter that we were able to deliver to our customers short lead time requirements.
In addition, we were able to ship backlog created during early 2020 due to capacity supply constraints, reflecting roughly half of the upside to our guidance in the quarter.
On a pro forma basis, including a full quarter of artists and revenue prior periods Q3 revenue grew 35% year over year X.
Excluding artisan organic revenue grew 12% sequentially and 50% year over year to $201 million.
Turning to revenue by market.
Sales into semiconductor in Q3 167 million up nearly 15% from a strong second quarter and up 73% year over year with good demand across foundry logic and memory.
Revenues were up 70% on a pro forma basis.
There's a 41% sequentially and another record for the company non.
Non-GAAP other expense was $2.4 million, including $1.1 million of interest expense.
We expect total other expense to be in the one and a half to $2 million range going forward.
Our non-GAAP tax expense was $9.8 million or 13.3%, primarily as a result of favorable mix of foreign earnings and the integration of artists and into our tax structure on a year to date basis.
Looking forward, we now expect the GAAP and non-GAAP tax rate to be in the 15% range.
Non-GAAP earnings for the quarter were a record $1.66 per share up 41% from $1.18 last quarter on higher revenue and margins.
Cash flow was $110 million.
Capital expenditures for the quarter were 11.8 million and depreciation was $7.2 million.
The higher than normal Capex in this quarter was due to a one time investment and facilities to support expanded capacity in our Philippine operation.
Overall, we expect capital expenditures to remain about 2% to 3% of sales in line historical levels for advanced energy.
During the quarter, we repaid for $4 million, a principal amortization on our debt ending with total think that $326.3 million.
Are trailing 12 month gross that leverage decreased to 134 times well within our target range of one to two times.
At over 20% operating margins are achievable.
Our strategy of being a pure play power provider to industrial growth markets is enabling key competitive advantages and our continued focus on improving our operations to drive further revenue growth and profitability.
Looking forward, while timing of orders and market dynamics may drive some quarter to quarter variation. We believe overall demand for our products remain solid and 2021 is setting up to be a good growth year for AG with multiple drivers across our verticals.
With that let's take your questions operator.
I need to grow and we are well positioned to benefit from this growth.
Edwin.
Yeah. So this particular, one we won the design on.
Enterprise OEM, who has a high performance comes in platform that they are they are rolling out right.
But I think the.
Who idea that.
Things move forward them more aio machine learning kind of application being adopted and your hair for multiple accompanying talk about high performance computing.
Really good quarter and Thats why you wanted to call that out in particular is the catch up on that backlog now if you look at our backlog numbers. There were still quite strong because we were able to fill some of that in at the very end of the quarter due to strong demand we saw.
The second comment on gross margin. What we said is the sequential improvement from last quarter was largely the result of higher volume and what it illustrates though is that some of the underlying improvements we've made in portfolio rationalization as well as costs are really shining.
True.
As you saw this quarter on a non-GAAP basis margins are almost 40%, which is close to our goal.
Even though we havent completed kind of our phase two structural changes for.
Cost of sales and supply chain in some material cost savings that we think we can achieve over the next two years.
So it wasn't really any one time item in gross margin is more the benefit of volume, but we're seeing.
We're seeing the actions were taking underneath that really was starting to come through which gives us a lot of confidence about our ability to to get to 40% gross margins over over the long run as as we see good volumes in the business.
One comment about one comments about the quarter is our ability to respond very quickly to changes in volume and mix.
And that allows us to deliver to customers when they need it.
And and addresses burson demand in Q3.
Yes. Thank you one last quick one if you don't mind could you just.
Briefly talk about.
Our next question comes from the line of par Tosh Mitra with Berenberg.
Great. Thank you good morning.
What the medical component how much is that within the industrial and medical business and how are you looking for growth potential act for the major part of that business.
Yes, overall, we said last quarter that our medical is about $75 million and it's been growing.
Instrument because these are capital investments. So in this specific market, we see growth coming from our consumer electronic product coating and these are a travelodge nickel coating or optical coating.
We see increasing need for automation and motion control.
Power business over 100% both in the quarter and I think you're at a date, which sounds perhaps faster than your overall semiconductor business. So wondering if if you might be looking at you know apples and oranges here just to you.
Clarify your comments about your beliefs are growing faster than peers, and then I've got a couple of follow up six.
Sure. Thank you for the question Queen.
I think you're not looking at apples to apples I think I need to really take a deep dive and look at the definition of power.
Now if you look at the growth I'm, saying right now categorically categorically, we are growing faster than N T S.
Q3 year over year, you to date have second half versus first half and you over a year.
And we.
We'll be able to talk to you later, but show you some numbers.
So we are growing faster than MKS in every category of growth comparison, you look at.
Don't know how they defined power.
The the the area, we compete with them.
Well.
Mehdi, obviously, we need to be very carefully very careful about customer information and our business size and activities are customers sites.
Question Mehdi.
So the 10-Q and I wanted to go back.
Back to some of your targets.
You have highlighted consistently your desired goal and exiting exceeding revenue target of 1.5 billion and.
Cash EPS of 650, your Q3 results. Despite the one time adjustment to backlog from earlier this year.
Puts you above that run rate and as you look into the future and I understand you're going to provide us an update.
On December 14, but as you look into the future do you think that you are going to continue to exceed your targets organically.
Or is this going to be a mix of organic growth and as selective and opportunistic acquisition.
Yeah, those long term targets that we talked about many do not do not include acquisition. So that's that's organic growth.
Target.
I like that.
Now there's one more.
Quick question regarding the momentum you talked about how you see that.
Business units trending but the youth.
You can answer qualitatively or quantitatively on your book to Bill above 1.0 exiting Q3.
Yes, it's a tough question to answer because as you know our book to Bill we don't really have.
A book since a lot of our product, especially in semi.
And to some degree than any embedded power there there Paul there's no order for image get pulled from a CIT banner from a hub right, but on balance I would say, we feel are outside of maybe that.
The catch up in backlog certainly our book to Bill is at least 1.0 or higher.
It is not process power now it doesn't mean that it's not important these power supplies you'd be do not operate in the whole machine doesn't move.
So these are really important important power.
Hi supplies with unique capabilities that that you know serve the global platform not only inside the fab, but also outside of the fab in the back end of the of the process testing and packaging.
So this was an area that.
You know we continued to drive in semi but we also see additional growth.
Humming to industrial applications.
Is it start moving products from different product lines that basically belong to either Navy Navy Bartizan, we know cross selling them to do the two different markets. So it's an area of of you know.
Second Patel.
Potential incremental growth and drives a lot of excitement would we bring to the table and some of these applications are global footprint.
Our global manufacturing capabilities and support.
Infrastructure around the world.
With our high density and high efficiency of conversion plays well into those with start looking into.
Efficiency of power.
You know and.
And.
And performance locally around the world. So we're very excited about that and we do that is one of the.
No.
Revenue synergies associated with the recent acquisition.
Being births.
And we have the capacity we have the test equipment, we have the the fixed cost in place already.
And variable costs will vary with the with the volume. So we expect not only to be able to.
Address the capacity increase but also to do it in a very efficient way financially.
The consumer time today.
Thanks, Tom.
Your next question is from Pavel Molchanov with Raymond James.
Thanks for taking my question guys.
Obviously the election results are still so little fluid bye.
Let's assume for the sake of argument that there will be a change in administration.
And in that context, a different approach to trade with China specifically.
Wide impact if any would the ending of the trade war have on your business.
It's a good question avail.
Obviously that.
It's a difficult one to answer because it's there's a lot of dynamics, but.
Look broadly I think the effects of the trade.
In tariff war, so far have had not a lot of effect on our business directly.
Because we have a global footprint, we're global customers, we haven't seen a big big impact.
Speculatively.
With the change in trade policies.
Improved overall economic growth.
And and trade in that regard and I think thats probably good badly.
Youre right.
Economies in general and and for our industry, probably as well.
Yeah, our global footprint Palmdale allows us to deliver to our customers globally.
And manufacture close to where our customer.
Our.
So in that sense, we haven't seen dramatic impact thus far on our business with restrictions and so that vision, we expect to see unless there was an increase in geopolitical landscape.
A landscape that will increase GDP across the board, which will benefit us.
We lose we don't expect to see dramatic changes.
Understood.
Let me turn to the service revenue.
Yes, certainly sense you are kind of a victim of your own success you have some product sales now that service as them.
Slice of the revenue mix is now.
Less than 10% I know you've talked in the past about kind of building off your recurring revenue stream and in that context.
Is that something that would be irrelevant it could be that the M&A.
Acquiring any any kind of service or perhaps software businesses that thats relevant to Korea or yes. So availity, let me make a comment and maybe clarify something for you relative to the comments you made about our declining service as a percent of total revenue.
Significant portion of our service revenue.
Comes from our process power business from what we call the advanced power or Native AG. If you may and the reason for that.
These are extremely sophisticated an extremely expensive products.
And and when they when they need you.
Treatment or repair or calibration.
Normally they are being shipped back to us through our labs around the world.
And we take care of them and ship it back to our customers because.
The value of the asset is so high.
In the embedded power business that came through the acquisition.
Many of these power supplies.
Our not being repairs when they fail they are being replaced.
So it doesn't generate service revenue is generated product revenue.
It's just a matter of categories, our native service business continues to grow.
With our installed base and we expect the business to continue to grow and we accelerate the growth of this business by offering.
Service products like upgrades retrofits, refurbishments et cetera, so that will continue to grow but the decline in percentage of sales total revenue is a result of the product mix.
Now going to the other areas if you ask about.
Software is becoming an important product for us as we launched our in our power insight.
Offering.
We're making an investment and progress in providing software products.
To our customers that are adjacent to our core products and provide our customers with unique.
Unique capabilities like big data analytics predictive maintenance.
And Im process diagnostics that will continue and our aim is to continue to grow this business and to offer that disease. This offer products to the market.
First in semi but later industrial and telecom networking as well.
Thats very clear and I appreciate the clarification on that point. Thanks.
And your next question is from Krish, Sankar with Cowen and company.
Hi, Thanks for squeezing me in I had two of them first will you. All you know when I look at your semi cap revenues or shipment.
Compared with your peers in contrast to the customers like Lambeth clearly looks like Youre.
The growth rate is much higher than theirs and I understand that your customers. Both the building from buffer inventory because of cooling, but do you worry a bit from points next year. This should normalize and you.
Semi cap goods, it could slow down, especially as your shipments.
Got you up with your customers.
The answer the phone so you know.
Look at.
We anticipate I'm trying to be careful not to predict a market for you're not trying to be market analyst.
But we are prepared and have the capability to manage and respond to changes in volume and mix and we believe that we are going to see over Dino long the long range of of the industry growth.
We're not going to have every quarter.
Up into the right in the industry, we're preparing for that now the other thing that I believe that that happened, especially in Q3.
We had a burst of demand.
You know it was it was.
It was really at a demand to deliver faster and quicker and we have the capacity we have the operation operational excellence to be able to respond to these demands now.
I am sure Thats, putting your question, you're asking about building inventory building in the industry and I can tell you that there is some of that there's some of that inventory building in the industry. This some of it was was driven by the I would say the trade war and restrictions.
Okay shipments.
But but but it's not significant to the point that will impact us dramatically going forward.
Got you all look very helpful. Let me.
Just as a follow up on the data center side of the business you spoke a lot about the hyper scale.
Clinton your traction the I'm going to kill to see on the other part of the deal sentences enterprise spending how do you see that business from looks like I'd, but we put down this year.
How do you like enterprise to trend into next year. Thank you.
So let me let me address let me address the Hyperscale first.
We are we believe that we are in a third inning of our journey in basically designing our products into the top type Hyperscalers right and if you look you know based on information we have shared with you earlier over the last three quarters.
We have recently got upset at the rate of our product shipments were into a third hyperscaler at the same time, we're making great progress in designing our products into additional Hyperscalers now if you look at the right now where we are in the journey, we still highly.
Concentrated in just a few hyperscalers.
Now we believe that in the short term, we're going to see digestion in the Hyperscale.
You know a market as some of the Hyperscalers basically use the inventory that they acquired and and when we look at the market and I think in our prepared remarks, we said, we expect to see a resumption of growth.
Coming in Twentytwenty, one out we expect when the market recovers to do better than the market because we continue to gain market share and we continue to gain market share as a fast follower.
Because of our unique product offering with very competitive.
No.
Energy conversion efficiency and power density.
On the enterprise area.
So right now we see our IC spending is slow.
But it's a high performance.
Kitting will become a driver for the enterprise computing space and Thats why we highlight that this area. We are excited about it because we see more investments in a high performance computing.
No see views from Intel on DMD, We believe will also be a catalyst to a cycle of investment in Twentytwenty, one and we were looking forward to participate in this recovery.
Got you. Thank you all to the color very helpful.
And your final question comes from Weston Twigg with Keybanc capital markets.
All right. Thanks for taking my question I just wanted to follow up on that on a burst of order activity you mentioned at the end of the quarter and just mentioned in the last comment.
Why why doesn't that burst in demand carry through to Q4 guidance and other advice coupons are down yes order activity is picking up was picking up at the end of Q3 Im just kind of wondering if you add some color, there, but which kinds of customers, we're doing and why it seems sort of temporary.
Yes, it's a good it's a good question Wes declared by when we look at that that surgical business. We think that is largely prepositioning of inventory to kind of get ahead of seasonal shipment pattern some of the geopolitical.
Near term geopolitical items that you just talked about by by some customers not all but my view.
Overall, we despite that we expect semi to still stay strong thats, what we said in our program has been strong in Q4 so.
That that's not necessarily what's driving the guidance. We also said that we don't expect this kind of catch up from backlog that we cast on earlier in the year to repeating in the Q in Q4.
That helped Q3 quite a bit and then secondly, we also said the data center is going to be lower based on customer specific and industry digestion. So those are the primary drivers.
Lastly.
Those risks around a covert and other environmental things that continue one we've largely managed sales, but the two big.
No items that then lead to lower guidance is just we don't expect that that backlog catch up to repeat and we'll see lower impact lower their data center.
That that's that's the digestion in the data center market that that's fine you want that.
Okay that helps and then the other follow up question I have is just gross margin the guidance is quite good 38, 39%.
But you talked about growth in industrial medical telecom over the next few years and Im just wondering if.
Yes, the semi.
So part of the semi demand growth. This year was was inventory restocking and you see the other segments grow nicely next year do you have a gross margin headwind in 2021 that might trend a couple that 38, 39% range or could be could you see that maybe staying in that range, you're getting better through the year next year, yes.
Yes, obviously mix can have some some impact but look if you look at this year semi is up but so is our embedded power products are up and our gross margins are up in both areas.
The impacts that were making from a synergy perspective foundation perspective, or having having the having the desired effect and as we look into next year, we'll see we'll see some more improvement so.
On balance I'd say the answer to your question is no. We think we can do to continue to drive gross margins, but there could certainly be some mix impact that we saw big swings in those two markets.
So just to clarify you think gross margin could trend up through the year generally speaking.
But with some mix variation yes.
Yes, generally speaking yes.
Okay. Thank you.
I would now like to turn the call over to Yuval Wasserman for closing remarks.
So thanks, everybody for joining us today, obviously, we're extremely excited with the progress. The company is making we're extremely excited about our future projections in the future of this company.
Both.
We have four areas that excitement semi data center medical and Fiveg and we expect those to drive continuous growth for.
For the future for the company in the future, we're gaining share and we are continuing to expand our presence invest in new products that allow us to accelerate our penetration to new applications and markets are looking forward to see many of you in December when we will provide you a deeper dive into.
Policies of the growth trajectory the applications targets, we serve and update on our aspirational goals.
Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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