Q4 2020 Advanced Energy Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the advanced Energy Industries fourth quarter 2020 earnings Conference call.
At this time all participant lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star, one and I'll get telephone keypad.
If you require any further assistance please press star zero.
I would now like the hand today's conference over to your Speaker Edwin Mok, Vice President of strategic marketing and Investor Relations. Thank you. Please go ahead.
Yeah.
Thank you operator, good morning, everyone welcome to advanced energy fourth quarter of 2020 earnings call.
With me today are Yuval, Wasserman, President and CEO, Paul Oldham, Our executive Vice President and CFO and Brian Smith, our director of Investor Relations.
If you have not seen the our earnings press release, you can find on the website at IR advanced energy Dotcom day.
And there you also find the slide presentation to fall of law our discussion today.
Before I begin I would like to mention that AE will be participating at several investor conferences in the coming months as events occur we will make that announcement.
Let me remind you that today's call contains forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees all future performance and.
The formation, considering these risks and uncertainties is pharma and now filings with the FCC.
All forward looking statements are based on managements estimates projections and assumptions as of today February 10, 2021, and the company assumes no obligation to update them.
Long term targets present today, including the aspirational goals and our long term vision goals should not read interpret it and the respect that guidance.
On today's call all financial results will you present, the on the non-GAAP financial basis, unless otherwise specified <unk>.
Exclude from non-GAAP results, all amortization stock compensation and integration and transaction costs.
Unrealized foreign exchange gains and losses.
And the restructuring items.
Detailed explanation and all of that non-GAAP financial measures.
Reconciliations between GAAP and non-GAAP measures can be found in the press release day.
With that let me close the call to our President and CEO Your ball Wasserman Yuval.
Yeah.
Thank you Edwin.
Good morning, everyone and thank you for joining us on this call.
The advanced energy finished last year and a strong note with Q4, 'twenty and 'twenty revenue of $371 million up 10% year over year and.
And solidly above our guidance midpoint.
Non-GAAP EPS of a dollar and the 49 cents was at the top of our guidance range.
The fourth quarter of results were driven by strong demand for our products across most of our markets and good execution in and increasingly dynamic operating environment.
Service revenue again set a record.
Our Q4 results built on a great year for financial performance. Despite the global Coronavirus pandemic debt presented all of us with extraordinary challenges.
I am extremely proud of our organization's response to the constant changes throughout the year.
Demonstrating a is agility and operational excellence.
Our diversified global operation footprint nimble supply chain hub inventory management system, and maintaining a healthy and safe workforce enabled AE to effectively meet shifting customer requirements and to deliver a strong 2020 results is the outperformed.
The market.
2020 revenue grew 17, 9% as reported and 18% on a pro forma basis to a record $1 4 billion.
With our semiconductor business growing 50% and data center computing growing for the 6%.
Our non-GAAP earnings more than doubled to $5.23 per diluted share and we generated over $200 million in cash flow from continuing operations.
Paul will go into more financial details and.
His remarks.
Advanced of energy is a clear leader in prestige and electric power conversion and control.
Our power solutions are used in many of the enabling technologies behind the fourth industrial Revolution and the data economy.
Last year, he not only capitalize on the accelerating Mega trains of these markets but.
But we also introduced 12, new products to help speed up our customers of innovation and expand our addressable market.
Examples of major innovations, we brought to the market include E. Voss are beyond our power solution that we believe will enable advanced plasma processes for multiple next generation technology nodes.
Additionally, our system level 48 volt power shelf will allow data centers to become more power efficient and cost effective.
Our intelligent lighting and power control system will help indoor farms to substantially lower power consumption and cost while increasing crop yields.
We now enter 2021 with a richer portfolio of differentiated products that we expect will continue to enable the breakthrough innovation by our customers and fuel our continuing growth.
In line with our strategy to accelerate our growth and diversification through strategic acquisitions at the end of 2020, we completed the acquisition of first of all power extending our reach in the medical market with its field proven RF power supplies.
First of all power brings to AE well established experience working in the highly regulated medical market and an 18 year of customer relationship with one of the leading medical technology companies.
In addition, we expect to integrate and versatile technology into our enterprise technology roadmap and to cross shell current first of all the solutions across our market verticals.
This is another example of AE using smart acquisitions to grow our scope and leverage our scale.
Our 2020 results affirm the success of the acquisition of <unk> embedded power as we integrated the business into E scalable platform.
Despite the COVID-19 related challenges, we exceeded our integration milestones and deliver on our synergy goals and we believe that we are on track to meet or exceed our long term cost synergy target in roughly half the time of our original plan.
With a fully integrated functional organization structure, we have the scale and the scope to drive sustainable competitive advantages as a top tier of industrial technology growth company.
We continue to pursue our long term strategic and aspirational goals.
In Q4, we continued our investment and ESG initiatives launching a new scholarship program to support increased diversity in stem education, we have tremendous interest with applicants from multiple the universities across the various technical disciplines, we will continue to enhance our.
ESG initiatives as part of our commitment to the live a long term value to all of our global stakeholders.
Now, let me comment on our fourth quarter performance.
And our markets.
Our Q4 semiconductor revenue was at the high end of our previously stated second half growth rate of 15% to 20%. After an exceptional Q3, driven by robust demand in foundry logic and strengthening NAND.
We expect this healthy market condition to further improve in Q1.
We are extending our leadership and semiconductors, as we launched new products, including a new high power RF generator or the Paramount HP, Inc.
And a new remote plasma source the Max Dream.
In addition, we shipped the evaluation units of E. Voss two of number of strategic customers during the quarter and we want and our H design for a next generation P. C V diesel it's one of the top equipment Oems.
In Korea, we secured new RF design wins for a leading CVD and L. D platform and for a next generation edge for NAND applications.
And the $300 million semiconductor of embedded power market, we secured a new design win in back end equipment by replacing multiple competitors D. C modules with our integrated solution.
Overall, our success across multiple funds will allow us semiconductor of business to continue to outgrow the market.
Driven by increase and the semiconductor industry, we expect our demand to increase and Q1 into further accelerate in Q2.
Turning to our data center computing market.
Demand declined in Q4 as expected, reflecting datacenter digestion, among our hyperscale customers and a generally weak spending environment.
We expect this market condition to extend into Q1, but we continue to anticipate growth to return later this year.
In Hyperscale, we are transforming from being a fast follower to becoming a market leader as.
As we grew of 'twenty to 'twenty revenue by over 250%.
Although this market could be lumpy. We believe we are still in the early innings of this journey and expect meaningful growth over time.
We continue to make solid progress at new Hyperscale customers and reiterate our target to deliver of production shipments to additional tier one hyperscale customers. This year.
We have also started to capture new opportunities created by the transition to 48 volt service.
In Q4, and additional Hyperscale customer selected our 48 volt power shell and we secure the design win for our board mounted and 48 volt DC to DC converter at the tier one customer.
In enterprise computing, we secured another high performance computing design win for a supercomputing platform at the leading customer.
As we continue to capitalize on our industry, leading efficiency and power density.
While the high volume production of this way and this may take time they.
And they support our roadmap of.
Adding over $100 million of annual incremental revenue by 2023.
Industrial and medical revenues grew 8% sequentially, surpassing our expectations and macro conditions improved in Q4 across several market as we saw good demand for solar cell manufacturing flat panel display and hard coatings for consumer devices. We also.
So benefited from growing demand for air filtration systems use and preventing the spread of Covid, which is of when we reported last quarter.
Revenue from medical applications declined sequentially on lower demand for some critical care equipment and the elective care applications. During the quarter, we secured several design wins from medical diagnostic applications with our families power supplies.
Our strategy for industrial and medical is to enable smart applications through our portfolio of products with the advanced digital capabilities.
During the quarter, we introduce a multitude of new products across our application set from Fireeye, metairie and industrial heating to indoor farming and medical.
While we expect the industrial to be physically down the Q1 and medical to see further pressure based on our solid design win pipeline, we are well positioned to grow this vertical for the year as macro conditions improve.
Revenues from the telecom and networking applications remain about flat from Q3 and were up 20% year over year.
The reflecting slightly improved market condition and success of some of our programs.
Overall telecom investment remains constrained and networking is facing the general slowdown in infrastructure investment.
With significant <unk> investments still ahead.
We are focused on winning the key <unk> designs.
In Q4, we secured an important five G design win for the small cell radio primarily designed for the U S market in.
And networking we won a design for a white box switch for a tier one Asia and Hyperscale customer, we continue to optimize our portfolio for higher earnings growth while in aggregate. These actions will impact revenue over the short term.
We believe the steps taken we will focus our resources on higher value added opportunities and continue to improve overall margins.
To summarize Q4, and 'twenty and 'twenty results demonstrate our unique position and benefiting from the fourth industrial Revolution, our successful growth strategies across our markets and the strength of our team and our culture.
Our focus on being a pure play power leader ease, enabling us to outperform the markets, we serve gain market share and expand into new and exciting opportunities.
We have built a track record of growing earnings faster than our revenue and delivering top tier return on invested capital.
At the end of 2020, we announced our regular quarterly dividend demonstrating our ability to generate consistent cash flow and our commitment to regularly return capital to our shareholders, while continuing to pursue inorganic growth.
Looking forward, we will continue to invest aggressively and bringing new enabling products and solution to our markets. Our growing pipeline of design wins reflect our success in converting those investments into tangible results. Despite near term macro challenges due to the coronavirus, we expect our top and bottom line.
Line to continue to grow in 2021.
Going forward he is well positioned to deliver long term sustainable growth through our innovation technologies and products and services.
Before I conclude my comments. This morning, we announced that I will be retiring as president and CEO of advanced energy effective March 1st.
Steve Kelley, who some of you know as the previous CEO of EMCORE will become the president and CEO of advanced energy.
To ensure a seamless transition.
Will remain as an executive advisor to Steve and the board through March 'twenty and 'twenty two.
I'd like to thank the board our shareholders, our customers and most importantly, our employees for their support over the last few years. It has been and amazing journey as we have grown the company introduced new products and technologies the live.
With the record financial results created shareholder value.
And two arms formed AE into and industrial technology growth company I am proud of our accomplishments and I'm grateful for the relationships I have developed over this time.
My retirement is a result of our standard succession planning process.
I have worked closely with the board of directors to identify the right person as the next CEO for advanced energy, we look for a proven leader who builds teams fosters innovation drive strategic vision and create shareholder value and we found these attributes and Steve.
Together with the leadership team I'm confident that he will lead a each of the next level of success.
With that let me turn the call over to Paul.
Thank you Yuval.
And good morning, everyone.
And I begin. Please note that all financial measures presented today will be on a non-GAAP basis, unless otherwise stated this quarter. Our non-GAAP results also exclude $5 2 million of restructuring costs, primarily related to the previously announced the closure of our Shenzhen facility and $3 8 million and noncash unrealized.
FX losses related to long term lease and pension liabilities of <unk>.
Reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today.
We delivered outstanding financial results and the fourth quarter with revenue above the midpoint of our guidance and non-GAAP earnings per share at the high end of our guidance range.
Despite the challenging environment, our team again executed very well.
Delivering to strong customer demand, primarily in our semiconductor and industrial markets.
Combined with synergies and good cost control, we achieved our second highest quarter ever and operating income and cash flow generation and an annualized return on invested capital of over 20%.
Okay.
Fourth quarter revenue was $371 million, reflecting nearly 10% growth year over year, but down 5% sequentially from the record levels in Q3.
Sales and the semiconductor were $166 million up 32% from last year and almost flat to last quarter are.
Our full year and second half 'twenty and 'twenty growth outperformed the market and industry again, as we continue to extend our leadership and semi power.
Our R&D investments during the last downturn are yielding tangible results with multiple new product introductions and the strong pipeline of design wins.
Looking forward, we expect semi demand to grow sequentially and the first quarter and further accelerate in Q2 on continued strength in foundry logic and increased demand and <unk> NAND applications.
Data Center computing revenue was $65 million down sequentially as expected as the market digestion of that began in Q3 continued into the fourth quarter.
Looking forward, we expect cloud digestion to continued to impact our data center computing revenue in the near term with increased investment and the benefit of new design wins driving higher revenues later in the year.
Revenue from our industrial and medical markets grew 8% sequentially to $94 million.
The better than expected performance was driven by growth across several applications, including motion control photonics and thin film coatings.
Medical revenues declined as expected from a strong Q3 due to critical care demand beginning to normalize.
Looking forward, we expect industrial and medical revenues to decline seasonally in Q1 versus Q4, but be well above the revenue level from a year ago.
Near term the impacts from Covid will continue to pressure of this market, but improved macro conditions should benefit our industrial applications over time.
Telecom and networking revenue was $46 million and the quarter down slightly from Q3, but up 20% year over year.
The overall global <unk> investments outside of China are expected to remain relatively muted in the near term.
In addition, we expect our portfolio optimization actions to begin impacting revenues and this vertical as we pivot towards higher value applications.
Non-GAAP gross margin for the quarter was 39, 5% down slightly from 39, 8% last quarter on lower volume.
Year over year gross margins increased 360 basis points, driven by material cost improvements product mix and accelerated synergy actions, including portfolio optimization and productivity improvements across our factories.
While we expect gross margin to decline modestly in Q1 due to lower volume and supply chain challenges our clients synergy actions should further improve gross margins over the next several quarters, enabling us to sustainably achieve or exceed our initial gross margin target of over 40%.
Non-GAAP operating expenses were $76 $9 million down $2 million from last quarter on lower variable expenses and timing of R&D project costs and our team did a good job of controlling expenses during the quarter.
As a result operating margins for the quarter were 18, 7%.
Non-GAAP other expense was $2 3 million, including $1 3 million of interest expense.
We expect other expense to remain and the one $5 million to $2 million range.
Our non-GAAP tax expense was $9 9 million or 14, 7% looking forward, we expect the GAAP and non-GAAP tax rate to remain in the 15% range.
Non-GAAP earnings for the quarter were $1 49 per share down from $1 66 last quarter on lower revenue, but up 71% from 87 a year ago.
Turning to our full year 2020 financial results revenue increased.
Increased by 79% on and as reported basis to a record $1 $42 billion.
On a pro forma basis revenues grew 18% driven by 50% growth and semi and 46% growth and data center computing, partially offset by declines in industrial and telecom markets, primarily related to Covid and macro factors.
Our full year 2020 gross margin was 39% approaching our initial long term model of 40%. After just the first full year of artist and integration.
Gross profit dollars increased almost 70% from 2019.
Average on sales growth and synergies from the artisan acquisition resulted in operating income more than doubling to $244 million or 17, 2% of sales.
As a result, 2020 non-GAAP EPS was a record $5 23 per share up more than 110% from $2 44 and 2019.
Turning now to the balance sheet, we ended the fourth quarter with cash and marketable securities of $483 million up $51 million from Q3.
Inventory declined by $35 million and turns increased to $4, one times do and parts of the timing and actions taken to structurally improve our inventory management.
This improvement was largely offset by a reduction in accounts payable on lower purchases and associated GPO of 50 days.
We expect both inventory and payables to increase and Q1 largely to manage supply chain constraints.
Receivables decreased on lower sales and DSO rose slightly to 57 days.
Total days of net working capital were 95% up two days from last quarter.
Operating cash flow from continuing operations was $67 1 million just below the record level, we generated last quarter.
Full year operating cash flow was a record for the company at $202 million.
Free cash flow from continuing operations was $56 million and Q4 and $166 million for the full year.
Capital expenditures for the quarter were $11 3 million and depreciation was $7 3 million.
We continue to expect capital expenditures to be about 2% to 3% of sales.
During the quarter, we also repaid $4 4 million of principal amortization and our debt ending with total bank debt of $322 million and net cash of $161 million.
Our trailing 12 month gross debt leverage decreased to one two times.
During the quarter, we did not repurchase any stock.
Finally, as announced last week, we declared a quarterly dividend of <unk> 10 per share, which will be paid to shareholders of record as of February of 'twenty.
Now, let me turn the guidance.
Overall, we expect Q1 demand to remain strong with sequential growth and semiconductor, partially offsetting seasonal declines and industrial and medical and the impact of portfolio optimization and telecom and networking.
Data Center computing revenues are expected to be at similar levels as Q4.
On a year over year basis, we expect solid growth across all of our market verticals, except data center computing due to the market digestion following a strong ramp last year.
While we see strong demand from our products the ongoing risks related to COVID-19, combined with global supply constraints and the electronics industry could impact our ability to fully meet this demand and the near term factor.
Factoring these risks into our forecast we are guiding Q1 revenue to be $350 million plus or minus $15 million.
Based on lower volume and higher supply chain costs, we expect non-GAAP gross margins to be 38%, 39%.
Operating expenses are expected to be up slightly on increased R&D investment.
As a result, we expect non-GAAP earnings to be $1 25 per share plus or minus <unk> 15.
Before I open for questions I would like to share some of my perspective on our business as our 2020 revenue growth demonstrated advanced energy is well positioned to benefit from the secular growth trends across our markets, while also gaining market share and expanding into new market opportunities.
And the doubling of our earnings reflect solid execution by our team our ability to deliver on our synergy plans and the operating leverage and our model.
Looking forward, we are as excited as ever about the demand prospects for our business as we should have tail wins across our markets and 2021.
Although the impacts of Covid and challenges and the global electronics supply chain may impact us over the next couple of quarters, we remain confident and both delivering growth and 2021 ended meeting our new three year aspirational goals of $1 65 billion and revenue and $7 50, and non-GAAP EPS.
And in achieving our long term vision of $2 5 billion and revenue and $12 earnings per share over time.
Finally, I would like to extend and my personal thanks to volume for his vision leadership and commitment to advanced energy has he led the transformation and success of the company.
And I have personally enjoyed working with you Paul immensely over these last few years and wish him well and this new chapter of his life.
I equally look forward to working with Steve Kelly and I'm confident and his ability to lead advanced energy to the next level of success.
With that let's take your questions operator.
Thank you as a reminder, in order to ask and audio question. Please press star followed by the number one on your telephone keypad once again that the star one.
And your first question is from the line of Mehdi Hosseini.
Yes, Thanks for taking my question and best of luck to you all.
I have a.
The one question for you want and I want.
And to better understand what instigated the change and the C. CEO of road I understand the succession plan, but.
I am kind of surprised given your aspirational growth. So if you could provide us with some color will be great and then in terms of.
Your.
The report how should I think about your traction and Japan, you talked about continued share gains, especially in the semi cap and I wonder.
And see how your.
Tracking with the share gains specifically and the Japan region. Thank you.
Thank you Mehdi.
Regarding my my decision to retire.
It is really part of our standard succession planning process.
Full disclosure I'll be turning 60 70 years old this year and my plan is to spend more time with my family friends and pursue some of my personal interests that'd be working very closely with the board.
To identify the person that will have the right profile and attributes to continued to lead the company.
And pursued the strategy that we've put together.
And as I state as I said earlier, we found these attributes with Steve Kelley and we're excited about Steve joining the company and we believe that so he has all of the capabilities skills experience and track record to do just that.
Regarding our market.
The market share gain.
The gains.
As you know 2020 was an amazing year for US we introduced tremendous amount of products I think more than any other company in our space in 2020, while managing the company through COVID-19.
Some of these products are enabling and especially in the semi industry. Some of these products will enable the next generation technology nodes, especially evolves.
The extreme the.
The RF D S.
We continued to gain traction we continue to gain share and one area that is really unique and <unk>.
Strength of advanced energy.
Our matching networks, we are of the world leader in RF matching which is really critical for the ability to deliver effectively RF power into the plasma.
This is another area that we'll continue to grow get.
And get traction and gain share.
Specifically regarding Asia, we continued to have good design wins in Asia as I reported.
Specifically to Japan, we are and increasing player in Japan with higher level of traction in very advanced applications and beyond that I cannot.
Sharing more information.
Got it thank you.
Thank you Mehdi.
Your next question is from the line of Scott Graham with Rosenblatt Securities.
Yes, hi, and good morning, and you've all congratulations and I know we've only.
No each other for sure of wild, but obviously the track record here has been terrific and you've really transform this company. So congratulate you. So amount of work. Thank you very mature so I wanted to maybe talk about the three year goals as well and.
And maybe kind of.
Piggyback onto the prior question. So why would we be putting these out now in front of the the change at the top particularly since you know if I may the the EPS growth target, which I assume is for 2023.
It is a pretty healthy target could you talk through why we would be releasing this today, rather than maybe waiting of quarter for Steve the half full input.
So really really good question.
So as I said as I said earlier.
The hiring of Steve.
And was driven by a process that is the standard succession planning process, when we talk to the street.
About the updated.
Aspirational goals three years out.
At that point.
Did not.
Conclude.
On a successor.
In terms of timing.
And our decision to <unk>.
On board, Steve to the company.
K after.
Our announcement of the aspirational goals. So there's nothing you know shifting of tricky about it.
The decision about my timing of retirement was driven by identifying the right successful.
Right and.
And if we didn't identify the right successor of probably will stay here for a longer period of time. So the timing of my retirement was driven by identifying Steve.
Yes.
Does that answer your question, yes. It does yeah from the most part if I could just sneak maybe one more and here again, you're hearing me not ask questions about the results, which I think of our straightforward.
And the nice quarter and all of that the guidance is very clear again, maybe one on the longer term. So you know you're way ahead of plan on the integration.
You know of artisan.
And your balance sheet is kind of back to the on a net leverage basis really being liquid.
Does this change from you the Steve slowdown potentially the M&A process as Steve kind of gets his head of round everything do you think there's a potential slowdown here I was I guess I was thinking that 2021 would be of big year for M&A for you guys again, yes.
And what is your thoughts there yeah. Good. Good question. So let me, let me give you a little bit of background right.
Board. The board has approved our strategic plan. The board has approved of long term goals the <unk>.
<unk> has approved the position of CEO and me and the board of together.
Decided of hiring Steve and bring Steve of the company.
Steve had a great opportunity to review the company's strategy to review our strategic goals to review of our aspirational goals both of three years out and the seven years out.
And.
After doing that excitedly decided to accept our offer and joined the company.
I do not expect to see any major deviation from our strategy going forward.
And our business model, our financial model are operational and what'll have proven and proven themselves over the last six years to be extremely capable.
Yielding results normally ahead of plan.
And yes, we are very you know of.
And we do have a very healthy balance sheet with the dry part of the will allow us to continue to pursue inorganic growth Steve.
Has a great experience and his previous position at EMCORE.
To go and pursue inorganic growth acquire.
Acquiring companies effectively integrating them.
<unk> value and and delivering a really strong shareholder value.
From my Vantage point and after talking to Steve during the process of.
Hiring him and.
<unk> is fully aligned with our long term strategy and our long term aspirational goals and.
And again.
Supported by the Board last comment, Steve and the management team compensation plan.
Is linked directly to our long term goals and objectives.
That's very clear you all again congratulations thank you for the the answer and.
Great job and transforming this company.
Thank you very much I really appreciate that.
Your next question is from the line of Tom Diffley of D. A Davidson.
Yes, congratulations from me as well Yuval.
Clearly and thank you Tom here, both the yeah.
The nice turnaround at the beginning of the story and then really impressive growth in recent years. So.
And the job well done.
Thank you for so if you look of that.
Hi, My question looking at the end markets it sounds like a drop off a bit in the industrial medical is that purely just seasonality or is there anything beyond that and then adding to that and the telecom networking side. It sounds like Youre trimming your portfolio debt anymore.
Any more color on that would be helpful. Sure. So, yes, indeed, the medical and.
Industrial is definitely seasonality.
And also you know all medical and medical.
The business.
And it was really of strongly affected by COVID-19.
As Youll recall last year, we saw a burst of demand coming from critical care equipment debt required our power supplies when the whole world, where the whole world was chasing the ventilator is and and the critical equipment at the same time, we saw a decline in elective procedures that was a little bit of a headwind.
Just to remind everybody three years ago, our medical business was zero.
So we have entered the medical industry, just a few years ago, and instead of growing and expanding and as part of our strategy.
Going forward, we expect to see continuing growth and the medical space driven by design wins and entrance into new applications, just like the one we announced about entering into more of the agnostic very very sophisticated.
Let's take the equipment and also I'm very excited about the acquisition of first of all the power as you recall.
And our analyst.
Analyst day about 18 months ago.
And we talked about and area and medical that we are going to pursue which is.
RF power supplies for medical applications.
Versatile power.
Brings to us the.
Deep knowledge experience and the capabilities.
In RF power supplies that are used for highly invincible and <unk>.
<unk> procedures.
The reason, we acquired adverse of how power one.
To accelerate our times of our time to market right. They are a bonafide player supplying RF power supplies for one of the leading companies in the world in these procedures and.
Now as a result of this acquisition they brought us the scope and we bring them the scale to accelerate the growth and to leverage the global infrastructure that AE has.
In General Industrial you should expect to see our business operating and growing at GDP plus <unk>.
As we said earlier we are pursuing.
The portfolio optimization strategy that is a combination of in some areas terminating end of life, Inc. Products and some other areas increased prices and some other areas shifting the focus to higher value add products. So that the mix will resolve and shifting of the.
Gross margin Bulker Bell curve to the right and we are making great progress the area that we mentioned earlier today.
And telecom and networking is an area that is more of the focus every day and 2021, although our strategy is to grow across the board implementing of classical 80 20 process to readout the.
As I call the the north very healthy of products and continue to shift to higher value of solutions.
I Miss anything Tom.
That's helpful. Maybe just as a quick follow up Paul can you give us the feeling for how much lingering costs.
And from Covid.
Both and your Opex and maybe even in your supply chain.
Yes, we've talked about that kind of running and the 50 basis points range and it bounces around a little bit more of a little bit less as I mentioned in our prepared remarks, we are seeing some headwinds on supply chain costs, specifically related to some of the logistics and shortages and took some part due to higher global demand and and.
Part of it and the fact that the Covid still has.
Many suppliers running below full capacity. So it is of continues to be a bit of a headwind for us in that range.
Okay. Thank you.
Yes.
Your next question is from the line of Quinn Bolton of Needham and company.
The <unk>.
Thanks for taking my question and.
You've all congratulations on your retirement and thank you for your leadership over the past several years.
Paul I wanted to start with you on your comments about the <unk>.
Costs, and the supply chain and potentially some shortages and wondering if those component shortages or other.
Limiting your ability to meet demand and in the first quarter or is your operations team able to get all of the semiconductor components you need for the power supplies to meet meet customer demand and then I've got a follow up question.
Yes, I think when we talked about the guidance, we tried to be pretty open and that demand continues to be strong.
But we do see risks and the operations around the supply chain, just getting getting enough parts.
And obviously you know that's it that's something you're always dealing with and we continue to deal with it the daily Battle, but.
But we tried to have our guidance reflects the environment were operating and which.
Not assets of broad set of.
And there's a broad problem across the the microelectronics industry, and electronics industry, and and and and and the near term, we think that will impact you know.
Our ability to ship products and that's contemplated in the numbers and sort of.
The forecast and the guidance of risk adjusted to reflect that quint.
And and we have the benefit of reporting later in the month. So we have and I think of better visibility and what's happening in the market and it's not across everything and the supply chain, it's really a few components.
Just a few components IC components that affect us the automotive industry and other industries, obviously, you need all of the bonds to be able to build the product.
The good news, we have really strong demand and as I said earlier, our semi demand is growing at Q1, and we expect it to accelerate in Q2.
Short term.
Our guidance reflects the risk adjustment related to shortage and Ics.
Great just a follow up on that just wondering in your conversations with the supply chain. How long do you think that they will be capacity constrained and think it tastes and probably six to nine months, sometimes to bring on additional wafer supply. So I'm wondering if you think it could be an issue you are facing promotions a year and then my second.
The question was going to be just around you of all the the update on the 14th.
And 48 volt power shell business it sounds like Youre, securing some additional design wins, but just wondering if you could give some.
The more color on the 48 volt power of shelf opportunity and sort of design win status and thank you.
Yeah, It's a good question Quinn obviously.
And that's a difficult one to answer, but clearly everybody top to bottom and the supply change of working together to the.
To get in more parts and of course of the demand continues to grow as Yuval said. So we you know this isn't going to be solved and a weak, but you don't want and we don't see it as a long term issue either.
So we'll be monitoring it closely you know we saw something a little similar last year with Covid onset of where it took us a couple of quarters to catch up if you will and the factory to the demand.
And so we'll see how it goes but clearly the big area of focus for us and I think the whole the whole industry.
Quintin regarding the 48 volts ease of two separate the wins.
One is the new hyperscale customer for our 48 volt power of shelf and as you'll recall the power of shelf is a really of power supply of that goes into Iraq.
And the support multiple servers right. The second design win is the board mountain and 40 ELD boards that convert from 48 volt to 12 volt DC DC converter and this one is designed into the server itself not and the shelf. So these are two.
And the way you can look at that as two different application spaces.
You know we have been designing 48 modules in the passing the in the telecom and networking space for many years and for that reason, we have the expertise the technologies and the experience that we can put that very quickly into data center application space.
And so it takes time to go into mass production.
But these wins are really prove our technology and support our long term targets of adding.
And annualized revenue of over $100 million increment incremental by 'twenty and 'twenty three.
Excellent. Thank you and congratulations again and your bulk.
To your point.
Your next question is from the line of Christian <unk> of Cowen and company.
Yeah, Hi, Thanks for taking my question and you all congrats on the solid tumors and E.
Okay.
I've two questions. The first one is on the semi you spoke about sequential growth and Q1 and Q2 is the mainly a function of non spending moving through the system or are you seeing the other aspects of WP, giving you the strength in Q1 and Q2.
I think it's the it's the same way of market drivers that you all see in terms of you.
You know, both NAND and foundry.
But you know at the same time, we see a few we have a few unique drivers that drive our business in semi and.
You know we have.
Grown our RF matching business.
Faster than the market.
We have new products that we launched to the market and we expect to see growth of.
And and also we continued to gain share in cross selling the embedded power power supplies into the $300 million Sam of the embedded power application space and the semi industry. So we have multiple drivers.
And grow our business, but I can tell you that from our vantage point right and the information we gather.
The demand is gonna be.
The stronger Q1 and.
And accelerating in Q2, and obviously as I mentioned earlier, everybody is challenged right now and he is going to be based on can we all get the IC components to deliver you know of those products on time to market, but the demand is strong and very excited we expect 2021 as we said earlier.
In general to be of growth year for us obviously of what we see right now and the semi space is and accelerated growth and demand.
Got it and then hopefully well and then a quick follow up.
And then you give some color on data center and you know the dilution that youre seeing there because I think you've mentioned in your prepared com and it should pick up later the few of them kind of curious with what is the catalyst or the leading indicator of looking for is it more like the enterprise budgets, improving and what are the key drivers for the.
The data center to the Covid and the second half.
Well.
You know the industry is launching new microprocessors and and adopting new price microprocessor and so a lot of of the buying demand in data center was it driven by the microprocessors or the Gpus that are being launched of the industry now we are and the very unique position.
We came from zero, just two years ago and have grown the business as you saw our growth rate in 'twenty and 'twenty was 250% as we can from nothing to becoming a.
Via ball bonafide, leading player displacing incumbents and gaining market share.
We are as a lagger, we do not have the presence of.
Among all of the Hyperscale, the tier one and tier two hyperscale rose.
And for that reason, we saw this surge in growth and 2020, but at the same time as the industry go through the digestion.
Our presence is still small.
Right. So we expect the industry to grow later this year and we expect our growth rate to continue a few years out as we transition our design wins into mass production and to growth and as we reported we have additional design wins at top tier of high.
The first killers that we expect to converge to a true revenue later this year.
Yeah.
Got it got tons of all and congrats again for everything you've done for a.
Thank you Chris I appreciate it.
Yeah.
Your next question is from the line of Amanda Karnataka of Citi.
Hey, good morning, first off you've all congratulations and enjoy retirement.
Thank you Amanda.
Youre welcome and I just wanted to follow up on that a D. C. Digestion topic that you were just talking about you know.
Should we think about this and sort of similar taste and needs, where we see a big step out that AR and inventory, Belgium, and datacenter and followed by and large period of digestion and or is this really just a matter of you are still early on in building out this market and its call and can be lumpy going forward.
And so what should we look at the cyclicality and Lumpiness and kind of started yes. It's a good question Amanda I think it's both the is definitely digestion in the in the in the market.
As you heard from Edwin ethane last time, we talked publicly.
And the timing of Intel you know transition to Intel's new technology affected the whole market the transition to new microprocessors effect of buying decisions.
Decisions and also you know and these are very large investments of capital investment and and they tend to have this peristaltics behavior of large investment these gesture and followed by and large ingestion digestion no. If if if we were and are in our case. If we were present in all of the players today.
We will see less fluctuations because not all of them you know.
A lumpy at the same time. The fact is we have only a third of the market.
And growing make us a little bit more susceptible to the expansion and contraction as we continued to grow.
As we continue to migrate our and design wins into mass production of obviously will be more diversified and less susceptible to the lumpiness.
Great and.
And switching over to the semi side.
Can you talk about any sort of pull ins that you might be seeing or unusual demand on the OEM side and and how if at all of your handicapping asked and I see and in China, and generally and your guidance.
I don't I don't think that we saw any abnormal behavior in and out in the semi business you know the way we operate with our key customers and semi is based on just in time.
They pulled our product from the hub, where they need them.
They gave us demand.
<unk> and indicators of going forward.
And and what we see right now as I said earlier is real demand growth real demand growth.
That is right now and the short term affected by the availability of of IC components that we all need including the automotive industry will need to build products.
Regarding SMIC honestly right now as we look at.
And <unk>.
So I see we cannot comment on.
On the S M I C and I think everybody, including our cash somebody is trying to get license to ship product and SMIC. So I don't think of that at this stage, we can comment on that.
Thank you.
Yeah.
Your next question is from the line of Pavel much of March all of Raymond James.
Yeah. Thanks for taking the question.
One of the things since obviously happened since the last earnings call is the.
Biden Tonight generation and the prospect of.
Trade normalization between the U S and China.
To the extent that you have faced any.
Regulatory or other of pressure in the Chinese market and the U S company.
And I'm curious, what what kind of change would be meaningful from Aep's perspective, specifically.
Thanks, Bob Al So I don't I don't think that Youre going to see any change at AE as a result of the change in administration the.
One thing that we are really proud about.
He is out of decision two and a half three years ago.
Two diversify our operation around the world.
With a focus on business continuity of strategy that led us to build our factory in Malaysia way before even everybody's talked about the elections and the whole idea was.
To ensure that we have the agility and the nimbleness.
To address.
The geopolitical changes political changes IP risks.
Et cetera, So the fact that we have.
All of our global footprint the way we have it today allows us to be extremely flexible and to make a decision together with our customers.
Where to build our products and where to ship it.
So you can imagine we can ship, we can make in China to ship to China, We can made outside of China to ship to outside of China.
And it's all in full alignment with our customers and obviously with and <unk>.
And full alignment with the local of regulatory requirements. So one of one of the reasons that we have done so well.
The last year through the challenges of COVID-19 was this ability to be nimble and flexible and agile. So right now we're not breaking out about the change and administration.
We also believe it's going to take time for any decision to take effect and.
And if it there if it if it does we have the agility to respond to it.
Okay. That's helpful.
The follow up question on the on the dividend.
At the at the time that you guys were.
Setting the range 10 cents a quarter. The obviously the stock looks quite a bit lower than it is today. So the yield now is barely.
3% are you ready at this stage to commit to a progressive dividend policy and you know.
And I need to say, how big the increases will be but just will there be a.
Our plan to raise the dividend with earnings or some kind of annual roadmap overtime.
Yes.
Good question.
That's a decision that we would revisit over time and and the board will revisit but when we introduced the program. We actually said that there's room for that to grow so.
There's no specifics around that but but theres certainly room for that to grow over time.
And I'll leave it there thank you guys.
Thank you.
Yes.
Your next question is from the line of power Tosh Misra of Bcm.
Great. Good morning. Thanks, guys. So just wanted to circle back on this and news flow about chip shortage and I was just wondering if there's any roll advanced energy can play in terms of helping customers increase production so anything.
And basically that can be done from the power supply side of that can boost the productivity.
Well obviously.
Obviously if customers decide.
And if end use customers decide to add capacity.
To manage the demand the inquiries and demand for IC devices.
We will be benefiting from me from from that because we are power supplies and enable the semiconductor processing.
You know.
Rod.
And technologies, we cannot influence the market.
But we can respond to the market quickly.
You know we were monitoring you know look at you know over the last 38 years of that have been and the semi industry.
Been there before when the market entering two of you know a shortage of components.
And in general what you see is.
And increase and effort and sometimes the cost of getting components through various channels.
And at the same time, increasing our capacity growth, where with some companies that are able to respond quickly and increase capacity really gear up get equipment and increase the.
The capacity of the fab. So it's a very dynamic environment, we've been there before and we have a very nimble and and the sophisticated <unk>.
Light chain management team.
And processes that will allow us to.
And to recover.
Thanks, John and thanks for all the details and I guess I'll follow up off of Paul for modeling purpose of any changes to our income statement items like the.
Depreciation and SG&A attach rate.
Relative to Q4 that you think of what flagging as we think about Q1 and beyond.
Yeah, we tried to comment on that and the prepared remarks, but are there should I'll say generally speaking the you know a lot of change we talked about opex up slightly we talked about the tax rate staying in the 15% range.
No no no no big changes in those and those various line items.
Thanks, Paul and again congrats to you of all for all of that you achieved in your career and all of the best for the next phase of your life.
Thank you very much part of touch.
Thank you. Our next question comes from the line of Weston Twigg of Keybanc capital markets.
Hey, thanks for.
Taking the question.
Real quickly the Miss.
Semi cap demand from the extraordinarily strong and the first half of the year you sort of accelerating in Q2 and I'm. Just wondering I don't know what your visibility is I know, it's typically not more than a quarter or two but regarding.
And regarding the second half do you think that acceleration continues or do you see and.
Any signs of moderation from your customers.
West of I don't think we are and you know we have that visibility and I.
And I cannot comment on the second half.
In general as you heard from from our partners and end customers. They.
The expectation and general the consensus of 2021 is going to be a growth year and exciting year and semi.
And we agree with that we support that.
The one thing that became clear to US you know as we speak is that this demand and Q1 will accelerate in Q2, and we have enough demand.
You know signals that the that allow us to state that.
And the demand is strong Q1 growing in Q2 and as I said earlier, it's all about the ability to.
To deliver on time.
On this demand and and and and it has to do with the.
The shortage, we've talked about I can't comment and the second half I can tell you again 2020 year 'twenty and 'twenty, one will be of growth here.
For the industry and it will be of growth year for advanced energy.
Okay. That's helpful. And then just finally personal power can you tell us how much of a revenue contributor of that is.
It's west it's very small.
The acquisition was.
And example of a tuck in.
Acquisitions of unique technology unique.
Product with the unique capabilities that brings a very special relationship with one of the leading surgical equipment companies and the world and and from that point on and we expect to see growth due.
And due to our scale and footprint and market outreach.
Okay. That's helpful. Thank you.
Thank you.
Thank you and that does conclude the Q&A portion of today's call I will now turn the call back over to you Bob Wasserman for any closing remarks.
So I'd like to thank everybody for your support and engagement and partnership over the last.
Six years of six and a half years.
It's been a pleasure to get to know your wallet and work with and working with you I'm excited about the future of the company I am excited about Steve Kelly joining us he brings all the attributes to be of great successor to take the company to the next level of.
Well I'm a <unk>.
Fading away and pursuing my personal and interest I will remain in the company until March 2022 to support the board and Steve. Thank you again and have a nice day.
Thank you. This does conclude today's conference call you may now disconnect.