Q4 2021 Advanced Energy Industries Inc Earnings Call

Speaker 1: Energy Fourth Quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.

'twenty one earnings call at this time, all participants are in a listen only mode.

And answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

Now I'll turn the conference over to your host Edwin Mok, Vice President of strategic marketing and Investor Relations you may begin.

Thank you operator, good afternoon, everyone welcome to advanced Energy's fourth quarter 2021 earnings conference call.

Speaker 2: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's fourth quarter 2021 earnings contest.

Speaker 2: With me today are Steve Kelly, our President and CEO , and Paul Odom, our Executive Rights person and CEO .

With me today are Steve Kelley, our president and CEO and Paul Oldham, Our executive Vice President and CFO .

Speaker 2: If you have not seen our earnings press release, you can find it on our website at ir.advancedenergy.com. There, you also find the Q&A link in the description.

If you have not seen our earnings press release, you can find it on our website at IR Dot advanced energy Dot Com Dare you also find the Q4 earnings presentation.

Speaker 2: Before I begin, I'd like to mention that we will be participating at several investor conferences in the coming weeks. So if you are interested, you can check that out as well and you can, even by name, as you are our cripple, join us at the &

Before I begin I'd like to mention that we will be participate at several investor conferences in the coming months.

Speaker 2: Now let me remind you that today's call contains forward-looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future.

Now 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 of future performance.

Speaker 2: Information concerning these risks can be found in our SEC.

Information concerning these risks can be fine in our SEC filings.

Speaker 2: All four looking statements are based on management estimates as of today, February 9, 2022, and the company assumed no obligation to...

All forward looking statements are based on managements estimates as of today February 19, 2022, and the company assumes no obligation to update them.

Medium and long term targets presented today should not be interpreted as guidance.

Speaker 2: Medium and long term targets presented today should not be interpreted as guidance.

Speaker 2: On today's call, our financial results will be presented on a non-GAAP financial basis, unless otherwise specified.

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

Speaker 2: Exclude from unknown gap results of stock compensation, amortization, acquisition related costs,

Exclude from our non-GAAP results, our stock compensation amortization acquisition related costs.

Speaker 2: restructuring expenses, and unrealized foreign exchange gains as always.

Restructuring expenses and unrealized foreign exchange gains or losses.

A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release.

Speaker 2: A detailed reconciliation between GAP and non- GAAP measures can be found in today's presentation.

Speaker 2: With that, let me pass the call to our President and CEO , Steve Kelly.

With that let me pass the call to El President and CEO , Steve Kelley Steve.

Speaker 3: Thank you, Edwin. Good afternoon, everyone, and thanks for joining the call.

Thank you everyone.

Good afternoon, everyone and thanks for joining the call.

We finished the year strong with revenue of nearly $400 million in the fourth quarter our.

Speaker 3: We finished the year strong with revenue of nearly $400 million in the fourth quarter. A new record for advanced energy.

A new record for advanced energy.

For the full year, we achieved revenue of $1 $46 billion.

Speaker 3: For the full year, we achieved revenue of $1.46 billion, also a record performance.

Also a record performance.

Demand for our products is very strong.

Speaker 3: and we carried a more than $900 million backlog into 2022.

And we carry to more than $900 million backlog into 2022.

We're also pleased with customer acceptance of our new products and technologies across a wide variety of applications.

Speaker 3: We are also pleased with customer acceptance of our new products and technologies across a wide variety of applications.

During 2021, we fine tuned our growth strategy Clare.

Speaker 3: During 2021, we fine-tuned our growth strategy, clarified our product roadmaps, added senior management talent,

Clarified our product Roadmaps.

<unk> senior management talent.

And increase the operating tempo of the company.

We successfully integrated two acquisitions versatile power.

Speaker 3: We successfully integrated two acquisitions, Versatile Power and T-GAM.

And again.

Speaker 3: which brought valuable medical, sensing, and calibration expertise to advanced energy.

Which brought valuable medical sensing and calibration expertise to advanced energy.

Our short term financial performance remains constrained by IC shortages.

Speaker 3: our short-term financial performance remains constrained by IC shortages.

However.

Speaker 3: It's important to note that our engineering and marketing

It is important to note that our engineering and marketing teams.

Speaker 3: remain squarely focused on developing market leading technologies and products which will drive the long term profitable...

It remains squarely focused on developing market leading technologies and.

And products.

Which will drive the long term profitable growth of advanced energy.

Speaker 3: And our sales teams are focused on taking those new technologies and products to customers throughout the world. needs. At our core, a big chunk of our

And our sales teams are focused on taking those new technologies and products to customers throughout the world.

At our core we are all about precision power technology leadership.

Speaker 3: and delivering that technology in a way which adds value for our customers. Now I'll provide more color on our fourth...

And delivering that technology in a way, which adds value for our customers.

Now I'll provide more color on our fourth quarter and.

And full year performance.

Speaker 3: Fourth quarter revenue and earnings per share surpassed the high end of our guidance. We secured additional critical ICs.

Fourth quarter revenue and earnings per share surpassed the high end of our guidance.

We secured additional critical Ics.

Which enabled us to ship more product than originally anticipated.

This ability to quickly turn.

Speaker 3: this ability to quickly turn incremental parts into product revenue.

Incremental parts into product revenue.

Stems from a decision we made last year to keep our factories fully staffed.

Speaker 3: stems from a decision we made last year to keep our factories fully staffed. No components or

Even though component shortages were constraining output.

This full staffing approach gives us the surge capacity, we need to take advantage of unexpected or lumpy delivery of critical Ics.

Speaker 3: This full staffing approach gives us the surge capacity we need to take advantage of unexpected or lumpy delivery of critical ICs. And it paid off for us in the fourth quarter. When has the

And it paid off for us in the fourth quarter.

Moving to the supply chain challenges.

The semiconductor supply chain remains dynamic.

Speaker 3: Most of the ICs we buy are built on mature process nodes.

Most of the Ics, we buy are built a mature process nodes.

Speaker 3: And that is where most of the industry-wide capacity constraints are.

And that is where most of the industry wide capacity constraints are.

Speaker 3: Many of our suppliers are working diligently to expand capacity.

Many of our suppliers are working diligently to expand capacity.

And most of that incremental capacity is.

Speaker 3: is scheduled to come online later this year or in early 2023. In addition, we are working closely with the public on the

Is scheduled to come online later this year.

Or in early 2023.

In addition.

We are working closely with our customers to qualify alternative Ics with better availability.

Speaker 3: In summary, we expect that IC shortages will continue to be an issue for much of this year, although we do expect improvement in the second half. As new capacity comes online, IC shortages will continue to be an issue for much of this year, although we do expect improvement in the second half.

In summary, we expect that IC shortages will continue to be an issue for much of this year.

Although we do expect improvement in the second half.

As new capacity comes online.

And our qualification and redesign efforts bear fruit.

We continue to pay a normally high prices to secure critical Ics in short supply.

Speaker 3: We continue to pay abnormally high prices to secure critical ICs in short supply.

Speaker 3: We also continue to experience unexpected supply decommits from certain IC suppliers.

We also continue to experience unexpected supplier decommit from certain IC suppliers.

Given these factors we are taking a prudent approach to our near term outlook.

Speaker 3: Given these factors, we are taking a prudent approach to our near-term outlook.

Now I'd like to provide color on each of our target markets.

Speaker 3: Our fourth quarter shipments into the semiconductor market grew sequentially and year over year. For the full year, we achieved...

Our fourth quarter shipments into the semiconductor market grew sequentially and year over year.

For the full year.

We achieved record revenue despite persistent supply issues.

Speaker 3: And over the past two years, our semiconductor revenue grew by 76%.

And over the past two years, our semiconductor revenue grew by 76%.

In the first quarter of 2022 weeks.

Speaker 3: we expect to grow semiconductor revenue sequentially and year over year.

We expect to grow semiconductor revenue sequentially.

And year over year.

At the Semicon West trade show in December .

We launched three new products for the etch and deposition markets.

Which feature advanced control capabilities.

Also in the fourth quarter.

Speaker 3: We want multiple new designs with our high voltage, critical sensing, and embedded power products. In the industrial medical market, we have a high voltage, critical sensing, and embedded power products.

We won multiple new designs with our high voltage critical sensing and embedded power products.

And the industrial medical market.

Our fourth quarter revenue was up sequentially.

Speaker 3: and year over year on improved component availability.

And year over year on.

Unimproved component availability.

In fact fourth quarter as well as full year revenue in this market at an all time high.

Speaker 3: In fact, fourth quarter, as well as full year revenue in this market, hit an all-time high.

We expect robust demand in the industrial medical market in 2022.

Speaker 3: We expect robust demand in the industrial medical market in 2022 and carried a substantial backlog.

And carried a substantial backlog into the first quarter.

During the fourth quarter, we launched three new industrial and medical products.

Speaker 3: During the fourth quarter, we launched three new industrial and medical products.

In addition.

Speaker 3: In addition, we secure design wins in medical.

We secured design wins in medical.

Speaker 3: test and measurement, horticulture, and solar cell manufacturing applications.

Test and measurement.

Horticulture and solar cell manufacturing applications.

Speaker 3: In the data center computing, telecom, and networking markets, fourth quarter revenues were well ahead of expectations.

And the data center computing telecom and networking markets.

Fourth quarter revenues were well ahead of expectations.

Due to improved component availability.

Speaker 3: During the quarter, we launched our next generation 48 volt power shell.

During the quarter, we launched our next generation 48 volt power shelf.

Which features 97% efficiency and industry, leading power density.

Speaker 3: which features 97% efficiency and industry leading power density.

Our telecom revenue grew in the fourth quarter.

Speaker 3: largely due to increased demand for 5G infrastructure equipment.

Largely due to increased demand for <unk> infrastructure equipment.

Now I'd like to touch on our strategy and some of the changes we've made in the past year to accelerate our growth initiatives.

Speaker 3: Now I'd like to touch on our strategy and some of the changes we've made in the past year to accelerate our growth initiative.

Our overall strategy is to drive profitable revenue growth by delivering best in class precision power solutions to customers in our target markets.

Speaker 3: Our overall strategy is to drive profitable revenue growth by delivering best-in-class precision power solutions to customers

Our customers rely on advanced energy innovation and technical talent to solve their most challenging power delivery issues.

Speaker 3: Our customers rely on advanced energy innovation and technical talent to solve their most challenging power delivery issues. The solutions we develop are typically proprietary.

The solutions, we developed for typically proprietary.

The foundation of our long term growth strategy.

During 2021, we reorganized our product development and marketing teams to improve the speed and efficiency of our new technology and product development processes.

Speaker 3: During 2021, we reorganized our product development and marketing teams to improve the speed and efficiency of our new technology and product development processes. We put a new leadership team in place, funding longtime advanced energy leaders with the ability to

We put a new leadership team in place.

Blending longtime advanced energy leaders.

With new leaders from outside the company.

The team works well together.

And our shared priorities are clear.

Speaker 3: In addition, we have allocated more engineering resources to the semiconductor industrial medical market.

In addition, we have allocated more engineering resources to the semiconductor industrial and medical markets.

We expect to increase our new product output.

Speaker 3: We expect to increase our new product output and win more designs in these markets.

And win more designs in these markets.

Speaker 3: Finally, we have taken major steps to strengthen our operations and supply chain organizations.

Finally, we have taken major steps to strengthen our operations and supply chain organization.

We believe that we are well prepared to quickly turn.

Speaker 3: We believe that we are well prepared to quickly turn improved component availability.

Improved component availability into product revenue.

Speaker 3: In closing, demand for our industry-leading precision power solutions remains extremely strong.

In closing demand for our industry, leading precision power solutions remains extremely strong.

We expect the gradually improving supply chain environment.

Speaker 3: We expect that a gradually improving supply chain environment, coupled with our shortage mitigation actions,

Coupled with our shortage mitigation actions.

We'll drive revenue growth in the second half of the year.

As a company.

Speaker 3: As a company, we remain focused on accelerating the execution of our long-term strategy to bring best-in-class precision power solutions to customer success.

We remain focused on accelerating the execution of our long term strategy.

To bring best in class.

Precision power solutions to customers in our target markets.

Speaker 3: Paul will now review our financial results and provide detailed guidance.

Paul will now review, our financial results and provide detailed guidance.

Thank you, Steve and good afternoon, everyone and.

Speaker 2: In the fourth quarter, we delivered revenue and earnings per share above the high end of our guidance ranges.

In the fourth quarter, we delivered revenue and earnings per share above the high end of our guidance ranges.

Speaker 2: Good execution by our team allowed us to secure additional parts, increase factory output, and begin to recover material cost premiums we've incurred.

Good execution by our team allowed us to secure additional parts increased factory output and begin to recover material cost premiums we've incurred.

Demand also increased with our backlog growing another 20% to $928 million.

Speaker 4: Demand also increased with our backlog growing another 20% to $928 million.

Speaker 4: Our strong Q4 performance demonstrates that as we receive parts, we are able to quickly convert that supply to revenue.

Our strong Q4 performance demonstrates that as we receive parts were able to quickly convert that supply to revenue.

Speaker 4: Looking forward, however, industry-wide supply constraints persist, and the environment is very dynamic.

Looking forward, however industry wide supply constraints persist and the environment is very dynamic.

Speaker 4: As a result, we continue to plan prudently in the near term, but see significant pent-up earnings potential as the supply environment improves.

As a result, we continue to plan prudently in the near term that see significant pent up earnings potential as the supply environment improves.

Now let me go over our financial results.

Fourth quarter revenue was a record $397 million up 15% sequentially and 7% year over year.

Speaker 4: Fourth quarter revenue was a record $397 million, up 15% sequentially and 7% year over year.

Sales into semiconductor were $179 million growing three 4% sequentially and 8% from last year.

Speaker 4: Sales into semiconductor were $179 million, growing 3.4% sequentially and 8% from last year.

Speaker 4: Demand remains strong, driven by robust fab investments, and we expect semiconductor revenue to grow sequentially again in the first quarter.

Demand remains strong driven by robust fab investments and we expect semiconductor revenue to grow sequentially again in the first quarter.

Revenue from our industrial and medical markets grew 22% sequentially and 5% from a year ago to a record $99 million.

Speaker 4: Revenue from our industrial and medical markets grew 22% sequentially and 5% from a year ago to a record $99 million.

Speaker 4: We secured more parts than anticipated, allowing us to achieve the strong performance.

We secured more parts than anticipated, allowing us to achieve this strong performance.

Customer demand was broad based and our backlog in this market increased again this quarter.

Speaker 4: Customer demand was broad based and our backlog in this market increased again this quarter.

Speaker 4: Data center computing revenue rebounded to $80 million, up 29% sequentially and 23% year over year.

Data center computing revenue rebounded to $80 million up 29% sequentially and 23% year over year.

Telecom and networking revenue was $39 million up 31% sequentially driven by strong telecom shipments to <unk> infrastructure, but down 16% year over year as a result of our portfolio optimization actions.

Speaker 4: Telecom and networking revenue was $39 million, up 31% sequentially, driven by strong telecom shipments to 5G infrastructure, but down 16% year-over-year as a result of our portfolio optimization after 22 million years.

Speaker 4: Non-gap gross margin for the quarter declined slightly to 35.5%, mostly related to increased material costs and unfavorable mix.

non-GAAP gross margin for the quarter declined slightly to 35, 5%.

Mostly related to increased material costs and unfavorable mix.

Speaker 4: In addition, during the quarter we recovered from our customers a portion of the premiums we have incurred for purchasing high-cost materials.

In addition, during the quarter, we recovered from our customers a portion of the premiums we have incurred for purchasing high cost materials.

Speaker 4: These premium recoveries benefited revenue, but negatively impacted gross margin percentage by approximately 150 basis.

These premium recoveries benefited revenue.

Negatively impacted gross margin percentage by approximately 150 basis points.

Speaker 4: We expect increased material costs and premium recoveries to continue to impact our gross margin percentage in the near term, but to improve later in the year.

We expect increased material costs and premium recoveries to continue to impact our gross margin percentage in the near term, but to improve later in the year.

Speaker 4: non-GAAP operating expenses were $86.1 million, up $2.5 million from last quarter.

non-GAAP operating expenses were $86 1 million up $2 5 million from last quarter.

Speaker 4: The sequential increase was due to investments in critical programs and higher SG&A expense.water production margins 38, Password &

The sequential increase was due to investments in critical programs and higher SG&A expense.

Operating margin for the quarter was 13, 8%.

Other expense was $2 5 million, including $1 2 million of interest expense and 700000 of foreign exchange losses.

Speaker 4: Other expense was $2.5 million, including $1.2 million of interest expense and $700,000 of foreign exchange loss.

Speaker 4: We expect other expense to be in the $2 million range going forward.

We expect other expense to be in the $2 million range going forward.

Speaker 4: Our non-GAAP tax expense was approximately $850,000.

Our non-GAAP tax expense was approximately $850000.

Speaker 4: The lower than expected tax cost was largely due to a year-end discrete benefit.

The lower than expected tax cost was largely due to a year and a discrete benefit.

Speaker 4: Excluding this item, the adjusted tax rate would have been approximately 12.5% on a favorable mix of foreign earnings and increased R&D tax credits.

Excluding this item the adjusted tax rate would have been approximately 12, 5% on a favorable mix of foreign earnings and increased R&D tax credits.

Looking forward, we continue to expect our GAAP and non-GAAP tax rate to be in the 15% range.

Speaker 4: Looking forward, we continue to expect our GAAP and non-GAAP tax rate to be in the 15% range.

Earnings for the quarter were $1 36 per share compared to <unk> 89 last quarter <unk>.

Speaker 4: Earnings for the quarter were $1.36 per share compared to 89 cents last quarter.

Speaker 4: excluding the discrete tax benefit, earnings would have been $1.21 per share.

Excluding the discrete tax benefit earnings would have been $1 21 per share.

Turning now to our full year 2021 financial results.

Speaker 4: We achieved record revenue of $1.46 billion, up 3% from 2020, despite the COVID-related impact on our operations and the industry-wide supply conf-

We achieved record revenue of $1 46 billion up.

Up 3% from 2020, despite the COVID-19 related impact on our operations and the industry wide supply constraints.

Speaker 4: Semi-revenue grew 16% and industrial and medical revenue grew 9%.

Semi revenue grew 16% and industrial and medical revenue grew 9% both to record levels.

Speaker 4: Sales into the data center computing and telecom networking markets declined due to supply constraints of critical ICs and our portfolio optimization act.

Sales into the data center computing and telecom networking markets declined due to supply constraints of critical Ics and our portfolio optimization actions.

Increased material costs related to supply constraints was the primary factor impacting our gross and operating margins.

Speaker 4: Increased material cost related to supply constraints was the primary factor impacting our gross and operating margin.

Speaker 4: As a result, 2021 non-gap earnings declined year-over-year to $4.78 per share.

As a result <unk>.

'twenty, one non-GAAP earnings declined year over year to $4 78 per share.

Turning now to the balance sheet.

We ended the fourth quarter with total cash of $547 million and net cash of $154 million.

Speaker 4: We ended the fourth quarter with total cash of $547 million and net cash of $154 million.

Speaker 4: Cash flow from continuing operations for the quarter was approximately $35 million and CapEx was $9.2 million.

Cash flow from continuing operations for the quarter was approximately $35 million and Capex was $9 2 million.

Speaker 4: We made debt principal payments of $5 million and paid $3.8 million in dividends.

We made debt principal payments of $5 million and paid $3 8 million in dividends in.

Speaker 4: In addition, we repurchased $21.5 million of common stock at $85.12 per share as part of our opportunistic share repurchase program.

In addition, we repurchased $21 5 million of common stock at $85 12 per share as part of our opportunistic share repurchase program.

Days of net working capital in Q4 decreased to 118 days on higher revenues.

Speaker 4: Days of networking capital in Q4 decreased to 118 days on higher revenue.

Speaker 4: Inventory decreased slightly on a dollar basis and turns improved to 3.1 times.

Inventory decreased slightly on a dollar basis and turns improved to three one times.

Speaker 4: We expect to see some upward pressure on inventory in the near term based on demand, but believe this investment allows us to respond quickly to customer demand as critical part shortages abate and represents upside to operating cash flow over time.

We expect to see some upward pressure on inventory in the near term based on demand.

I believe this investment allows us to respond quickly to customer demand as critical part shortages abate and represents upside to operating cash flow over time.

Speaker 4: Days payable fell to 68 days and DSO decreased to 54 days.

Days payable fell to 68 days and DSO decreased to 54 days.

For the full year of 2021, we generated $141 million of cash flow from continuing operations. Despite our investment in raw materials inventory, while we await critical parts.

Speaker 4: For the full year of 2021, we generated $141 million of cash flow from continuing operations.

Speaker 4: our investment in raw materials inventory while we await critical part.

Speaker 4: In addition, we used $78.1 million to repurchase over 900,000 shares of our common stock during the year.

In addition, we used $78 $1 million to repurchase over 900000 shares of our common stock during the year.

Now, let me turn to guidance.

Speaker 4: We expect the supply environment to remain dynamic, with continued risk on timing of critical component delivery.

We expect the supply environment to remain dynamic with continued risk on timing of critical component deliveries.

While our order book increased even after the strong Q4, we expect revenue will continue to be paced by supply.

Speaker 4: While our order book increased even after the strong Q4, we expect revenue will continue to be paced by supply.

Speaker 4: As a result, our 2-1 outlook remains largely unchanged from the view we provided last quarter.

As a result, our Q1 outlook remains largely unchanged from the view, we provided last quarter.

Speaker 4: We expect Q1 revenue to be approximately $360 million, plus or minus $20 million.

We expect Q1 revenue to be approximately $360 million plus or minus $20 million.

Speaker 4: Our Q1 guidance assumes semi-revenue will grow sequentially, while revenues in the other markets will decline, limited by availability of parts.

Our Q1 guidance assumes 70 revenue will grow sequentially, while revenues in the other markets will decline limited by availability of parts.

Speaker 4: We expect Q1 gross margin to improve slightly on lower volume.

We expect Q1 gross margin to improve slightly on lower volume.

Speaker 4: Overall material costs remain elevated, but we expect more favorable product mix and relatively lower material premiums and related recoveries. We expect the English highly recommend our videos but not to say so because of the No Carson errors.

Overall material costs remained elevated, but we expect more favorable product mix and relatively lower material premiums and related recoveries.

We expect operating expenses to be up slightly.

As a result, we expect Q1 non-GAAP earnings per share to be 94.

Speaker 4: As a result, we expect Q1 non-gap earnings per share to be $0.94, plus or minus $0.25, based on a share count of approximately 37.7 million shares.

Plus or minus 25.

Based on a share count of approximately 37 7 million shares.

Speaker 4: Before I open it up for questions, let me make some comments beyond the current quarter.

Before I open it up for questions, let me make some comments beyond the current quarter.

Speaker 4: We enter 2022 with strong demand and record backlog with greater than 70% mix of proprietary products that can largely be shipped as soon as we can secure parts.

We enter 2022 with strong demand and record backlog with greater than 70% mix of proprietary products that can largely be shipped as soon as we can secure parts.

Based on this last quarter, we provided an outlook that called for revenue of over $400 million per quarter as supply improves towards the end of 2022.

Speaker 4: Based on this, last quarter we provided an outlook that called for revenue of over $400 million per quarter as supply improves towards the end of 2022.

Speaker 4: While we do not expect meaningful improvement in the first half, we remain confident in our ability to achieve these revenue levels, or higher, on a sustained basis as parts become available.

While we do not expect meaningful improvement in the first half we remain confident in our ability to achieve these revenue levels or higher on a sustained basis as parts become available.

In addition, as premium costs normalize we believe we can deliver greater than $6 per share of annualized earnings exiting this year with additional pent up earnings potential in 2023.

Speaker 4: In addition, as premium costs normalize, we believe we can deliver greater than $6 per share of annualized earnings exiting this year, with additional pent-up earnings potential in 2023. With that, let's take your questions. Operator? And at this time, we will be conducting a question and answer session.

With that let's take your questions operator.

And at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question comes from the line of Quinn Bolton with Needham <unk> Company. Please proceed with your question.

Speaker 5: Hey guys, nice execution in the fourth quarter. I guess looking at the strength and the components you're able to secure in Q4, I have to assume your guidance implies that you think your components received in the March quarter are probably down about 10% or sort of in line with the revenue guide. Is that the way you're looking at component availability in the first quarter?

Hey, guys nice execution in the fourth quarter I guess looking at the strength in the components you were able to secure in in Q4 I have to assume your guidance implies that you think your components.

Received in the March quarter are probably down about 10% or sort of in line with the revenue guide is that the way youre looking at component availability in the first quarter.

Yeah currently make a comment there this is Steve Kelley.

Speaker 3: Yeah, Quinn, let me make a comment there. This is Steve Kelly. So in Q1, we're looking at our current line of sight for parts. So what we can see in front of us over the next seven or eight weeks till the end of the quarter.

So in Q1.

We're looking at our current line of sight for parts. So what we can see in front of us over the next seven or eight weeks till the end of the quarter.

Speaker 3: The second thing we're trying to do with our guidance in Q1 is to make sure we've got a relatively high degree of confidence in our midpoint guide.

The second thing, we're trying to do with our guidance in Q1.

Is to make sure we've got a relatively high degree of confidence in our move.

The midpoint guide.

Speaker 3: I think there is always a chance we will do better, but it is very hard to forecast these critical IC deliveries. Last quarter we were surprised on the upside with an unexpected lumpy delivery of ICs. We hope that happens again, but we can't forecast it.

I think there's always a chance we'll do better.

But it's very hard to forecast. These critical IC deliveries now last quarter, we were surprised on the upside.

With a unexpected lumpy delivery.

Yes.

And we.

We hope that happens again, but we cant forecast it.

Speaker 5: So it sounds like that lumpiness that allows you to beat the fourth quarter is truly lumpy and you haven't seen that activity continuing in the month of January and February to date at the same level you saw it in Q4.

So it sounds like the that that Lumpiness that allows you to beat the fourth quarter.

<unk> is truly lumpy and you haven't seen that activity continuing in month of January and February to date at the same level you saw it in Q4.

It's hard to characterize I think we have received what we expected to receive so far this quarter.

Speaker 3: You know it's hard to characterize, I think we have received what we expected to receive so far this quarter. Typically most of the action takes place in the second half of the quarter as our suppliers reallocate their product. That's a pretty dynamic process so it's hard to forecast.

Typically that most of the action takes place in the second half of the quarter.

As our suppliers reallocate their product.

That's a pretty dynamic process, so it's hard to forecast.

Speaker 5: Understood. And then for Paul, I was hoping you could give us a little bit more color on the premium recovery that you talked about. Premium recovery to me sounds like you're able to pass along some higher input costs or you're able to charge a higher price for your product.

Understood.

And then for Paul.

So I was hoping you could you could give.

Give us a little bit more color on the premium recovery that you talked about premium recovery to me it sounds like Youre able to pass along some higher input costs or you're.

<unk> able to charge a higher price for your products, but I think you said that that premium or recovery actually was a drag on gross margins, but I think you said 150 basis points, maybe I misheard, but can you just spend a minute and explain whats going on there with the premium recovery.

Speaker 5: But I think you said that premium recovery actually was a drag on gross margins, but I think you said 150 basis points. Maybe I misheard, but can you just spend a minute and explain what's going on there with the premium recovery?

And that's right. It's a good question Quinn so as.

Speaker 4: That's right. It's a good question, Quinn. So, as we've noted, we're paying in some cases significant premiums to get parts sometimes just on the open market. Our customers support us getting those parts because it's sometimes the only path to getting product to them. And so we've been able to increasingly pass along that cost.

As we've noted we are paying in some cases significant premiums to get parts, sometimes just on the open market.

Our customer support us getting those parts because it's sometimes the only path to getting product to them and so we've been able to increasingly pass along that cost to them, how they want to pass that cost along to them essentially we're receiving revenue that covers the cost of those parts. So it's it's essentially revenue at 100% cost.

Speaker 4: to them. However, when we pass that cost along to them, essentially we're receiving revenue that covers the cost of those parts.

Speaker 4: it's essentially revenue at 100% cost. And so it's helped our revenue in the quarter, but it increased our costs sort of at an equivalent level. Now the good news is we recovered that cost. Otherwise we would have just had the cost. But that's why you see a negative impact to the gross margin percent, because you have more revenue going through, not in our traditional margins, but more at a cost recovery level. Got it. Okay. Thank you.

And so it it has helped our revenue in the quarter, but it increased our costs sort of added equivalent level now. The good news is we recovered that cost otherwise we would have just had the costs, but that's why you see a negative impact to the gross margin percent because you have more revenue going through not than our traditional margins, but more of that cost.

Recovery level.

Got it okay. Thank you.

And our next question comes from the line of Steve Barger.

Keybanc capital markets. Please proceed with your question.

Hi, good morning.

Good afternoon, sorry.

Hi, Steve.

Speaker 6: Hi. How much of the backlog is currently work in progress and just waiting on ICs? I'm just trying to get a sense for how that will affect working cap and cash flows the year progress.

Hi.

Of the backlog is currently work in progress.

Just waiting on Ics I'm, just trying to get a sense for how that will affect working cap and cash flow as the year progresses.

Yes, I think the way to think about it Steve is when we look at what we would consider delinquent backlog custom product that customer was already want wanted and that they want in the coming quarter, we would characterize more than 50%, maybe 60% or more is sort of shippable in the <unk>.

Speaker 4: Yeah, I think the way to think about it, Steve, is when we look at what we would consider delinquent backlog, the product the customer was already wanted and that they want in the coming quarter, we would characterize more than 50%, maybe...

Speaker 4: 60% or more is sort of shippable in the next quarter, just awaiting those critical parts. Now we're not going to be able to ship all that because there's no way we'll get those parts in time.

Next quarter, just awaiting those critical parts now, we're not going to be able to ship all of that because theres no way, we'll get we'll get those parts in time, but it tells you that it's a very current backlog now we've seen increases in the backlog that go out one or two or three quarters as well, but the vast majority is shippable as soon as we can build it I think that's the way too.

Speaker 4: But it tells you that it's a very current backlog. Now, we've seen increases in the backlog that go out one or two or three quarters as well, but the vast majority is shippable as soon as we can build it. I think that's the way to think about it. And what that really means is that as we're able to get the critical parts and then increase our output.

Think about it and what that really means is that as we're able to get the critical parts and then increase our output then we should be able to recover pretty quickly.

Speaker 4: we should be able to recover it pretty quickly. That's why we've kept the capacity in the factory. That's why we've kept everything on the ready. That's one reason why our other inventories are up higher than they've been, because we have most of the full kits from any of these products in backlog. We just don't have some of the critical parts. I think Q4 is an example.

Why we have kept the capacity in the factory that's why we've kept everything on the ready. That's one reason why our other inventories are up higher than they've been because we have most of the full kits for many of these these products in backlog. We just don't have some of the critical parts.

I think Q4 is an example of where we were able to get some parts and we're able to turnaround those very quickly and you saw a little burst in revenues as a result of that so.

Speaker 4: where we were able to get some parts and we were able to turn around those very quickly and you saw a little burst in revenue as a result of that. It all comes down to how quickly and when we receive these critical parts.

It all comes down to how quickly and when we received these these critical parts, but certainly as we look across the year and supply environment improves. So what gives us confidence that we could operate at a much higher level in revenue and a much higher level of earnings as parts become available.

Speaker 4: But certainly as we look across the year and supply environment improves, it's what gives us confidence that we could operate at a much higher level in revenue and a much higher level of earnings as parts become available.

I guess to that point I know you started re qualifying new suppliers last year and.

Speaker 6: I guess to that point, I know you started re-qualifying new suppliers last year, and you mentioned that those efforts are underway, but can you be a little more specific about potential timing of that process and realistically when you could see some benefit that could help you start to draw down that back?

And you mentioned that those efforts are underway, but can you be a little more specific about potential timing of that process and realistically. When you could see some benefit that could help you start to draw down that that backlog.

Yes, I think the team has done a good job working with our customers to quickly qualify.

Speaker 3: Yeah, I think the team has done a good job working with our customers to quickly qualify alternate parts and also in some cases do redesigns of existing boards to accommodate new parts.

Ultimate parts and also in some cases do redesigns of existing boards to accommodate.

Newport's.

Speaker 3: So I think that has progressed very well. We expect the major impact to occur in the second half of this year.

So I think that has progressed.

Very well, we expect the major impact to occur in the second half of this year.

Speaker 3: So, you know, we're seeing some positive effect in the first half, but most of it will take place in the second half of 2022.

So we're seeing some positive effect in the first half, but most of it will take place in the second half of 2022.

Understood. Thanks.

Our next question comes from the line of course Shankar with Cowen <unk> Company. Please proceed with your question.

Speaker 7: Yeah, I'm answering my question. I had a couple of them too. First one, Steve, you know, when I look at your semi-revenues last year, you said you grew 16%. I understand supply constraints kind of really limited that growth. But if I look at your US peers, who have also experienced similar constraints, there's many business, grew to almost twice your growth rate. So I'm kind of curious what's going on with your semi-revenues. Then I had to follow up.

Yes.

Quick question I had a couple of them first one Steve you know when I look at your semi revenues last year.

You said it grew 16% and I understand.

A lot of constraints really limited the growth, but if you look at your U S peer group.

Experienced similar constraint does any business grew at almost twice your growth rate. So I'm kind of curious what's going on.

We've just sent me a I mean, it's been I had.

A follow up.

Yes, let me answer your question two parts Krish.

Speaker 3: Yeah, let me answer your question in two parts, Krish. I guess the first is the strategic share, right? And that's really determined by wins or losses in our core market, which is Conductor Edge. And what we're seeing so far is that we're winning all the major opportunities there in Conductor Edge. I think we're doing a pretty good job defending our strongest products.

The first is.

The strategic share right, and that's really determined by wins or losses.

In our core market, which is conductor etch and what we're seeing so far is that we're winning all the major.

Opportunities there in conductor etch I think we're doing a pretty good job.

Defending our.

Our strongest.

Products.

Speaker 3: In addition, we have some new technologies that will allow us to grow share in the coming years in some new areas like RPS and dielectric.

In addition, we have some new technologies that will allow us to grow share in the coming years in some new areas like Rps and dielectric.

Speaker 3: I think when you're looking strategically at market share, you need to take a look at your design ends and then the time lag between design ends and production. I feel pretty good about where we're at.

So I think when you're looking at strategically of market share you need to take a look at your design ins and then the time lag between design ins and production, but I feel pretty good about where we're at.

Your question is more on the tactical market share and.

Speaker 3: I guess our starting point would be 2020. If we look at the two year period, we've grown our semiconductor revenues by 76%, which is ahead of WFE.

Our starting point would be 2020, if we look at the two year period, we have grown our semiconductor revenues by 76%, which is ahead of <unk>.

Speaker 3: We outgrew in 2020 because our customers ordered early for the burst in 2021. And we underperformed quite frankly in 2021 because of the parts issues that we ran into.

We grew we outgrew in 2020, because our customers ordered early.

For the for the burst in 2021, and we underperformed quite frankly in 2021 because of the issues that we ran into.

Speaker 3: So our objective is to get better in 2022 from a shipment standpoint and semiconductor. So we intend to keep up with demand and also start rebuilding the hub inventories. Because last year, our customers coped with our shipping problems by eating into their hub inventory. Now we have to help them rebuild that inventory.

So our objective.

Is to get better in 2022 from a shipment standpoint, and semiconductor. So we intend to keep up with demand and also start rebuilding the hub inventories.

Because last year.

Our customers cope with the with our shipping problems by eating into their their hub inventory and now we have to help them rebuild the inventory.

Speaker 7: Got it. Thanks for that Steve. And then a follow up for Paul. And I'm just trying to look at the linearity of the numbers and income statements. It looks like as the year progresses your revenue should improve and if and when supply constraints ease you could hit like a 400 million run rate in quarterly revenue.

Got it got it thanks for that Steve and then a follow up for Paul.

I'm just trying to look at the <unk>.

Linearity of.

The numbers in the income statements it looks like as the year progresses your revenue should improve.

And if and when supply constraints ease do create like a 400 million run rate in quarterly revenues and at the same token the thinking that gross margins should be better.

Speaker 7: And the same token, the second half of this margin should be better. Is that right? And then how to think about optics, you know, um, you know, try to do the math. It seems like your optics is going to outgrow revenue group this year. I'm a right

Is that right and then how to think about Opex you know.

Tried to do the math it seems like your Opex is going to outgrow revenue. Good this year, regardless right.

Yes, so a couple of things Chris the first is that you're right. We would expect results to improve over the course of the year, but it's important to think about the seasonality of that we do think that the parts environment that we're in and continues to be challenging and we expect that to continue.

Speaker 4: Yeah, so a couple things, Chris, the first is that you're right, we would expect results to improve over the course of the year. But it's important to think about the seasonality of that. We do think that the parts environment that we're in, you know, continues to be challenging. And we expect that to continue, you know, not only the Q1, but in the Q1.

Not only.

The Q1 into Q2 as well and many of the actions that we have taken internally around part redesigns and even when we look at win more parts are kind of becoming available. We believe that's more in the second half. So we would expect to see Q2 very similar to Q1, when we look at R. R.

Speaker 4: And many of the actions that we have taken internally around part redesigns, and even when we look at when more parts are going to be coming available, we believe that's more in the second half. So we would expect to see Q2 very similar to Q1 when we look at.

Speaker 4: our outlook just based on parts availability. Now as those parts become available, as I mentioned earlier, I think we have upside to our revenue levels, which is why we've said that we expect to be able to exit the year at this $400 million rate or better. And the second thing is as this...

Outlook, just based on parts availability now as those parts become available as I mentioned earlier I think we have upside to our revenue levels, which is why we've said that we expect to be able to exit the year at this $400 million rate or better.

And the second thing is as as this.

Speaker 4: supply chain situation normalizes and we don't have these premium costs where we're paying for higher priced parts on the open market. That's going to also have a significant improvement in gross margin which allows us, we think, to get to an X rate of $6 a share.

Supply chain situation normalizes, and we don't have these I'll say premium costs, where we're paying for higher priced parts on the open market. That's going to also have a significant improvement in gross margin, which allows us we think to get to an exit rate of $6 a share.

Speaker 4: an annualized exit rate of six dollars a share. So we do think that the key to this is just parts of availability and that there's a lot of pent up earnings in the company. The question is timing and our best view of that timing is its second half.

And annualized exit rate of $6 a share. So so we do think that the key to this is just parts availability and that Theres a lot of pent up earnings in the company. The question is timing and our best view of that timing is it second half.

Speaker 4: and exiting the year we should be performing at a much higher financial level. Now you're right about operating expense. We think operating expenses are going to be up about 6%.

And exiting the year, we should be performing at a much higher financial level now youre right about operating expense look we think operating expenses are going to be up about 6% year.

Speaker 4: year on year if you look at all the pieces. Most of that's inflationary but you do have a little more cost from acquisitions we made during the year that have a full year next year.

Year on year, if you look at all the pieces most of that is inflationary, but you do have a little more costs from acquisitions. We made during the year that have a full year next year.

Speaker 4: And because revenues are relatively flattish at the beginning of the year, if you just do the math, you'll see that the operating expense growth is probably a little bit higher than revenue.

And because revenues are relatively flattish at the beginning of the year.

If you just do the math, you'll see that the operating expense growth is probably a little bit higher than revenue.

Speaker 4: Having said that, we believe that even with that growth, that exit rate of over $400 million in revenue and $6.

Having said that we believe that even with that growth that exit rate of over 400 million in revenue and $6 per share annualized contemplates that operating expense growth. So we don't think it makes sense to cut costs in this environment. It's a supply constrained environment. We've continued to invest in our critical probe.

Speaker 4: per share annualized contemplates that operating expense growth.

Speaker 4: It's a supply constrained environment. We've continued to invest in our critical programs, in our people. We are seeing some inflationary pressures.

Grams, and our people we are seeing some inflationary pressures.

Speaker 4: We've taken some actions to combat that, around efficiency and some reorganization that Steve talked about.

Taken some actions to combat that around efficiency and some reorganization that Steve talked about the fundamentally we believe theres a lot of pent up earnings in the model and it makes sense to continue to invest through this soft spot spot that's created by the part shortages.

Speaker 4: Fundamentally, we believe there's a lot of pent up earnings in the model and it makes sense to continue to invest through this soft spot that's created by the part shortages.

Awesome, Thanks for the color qualification.

You bet.

Our next question comes from the line of Mehdi Hosseini with <unk>. Please proceed with your question.

Thank you thanks for taking my question.

Speaker 8: Thank you. Thanks for taking my question. I joined the call later. I apologize for repeating a question already being asked. Steve, I understand you may not want to comment on WFP, but...

On the call late so I apologize if I'm repeating.

My question has already been asked.

Steve.

I understand.

You may not want it.

Comment on Ws.

W have fee, but.

Speaker 8: Some of your OEM customers have talked about 100 billion WF this year, which is very substantial and hitting new highs.

Some of your OEM customers have talked about 100 billion.

Do you see this year, which is very substantial.

Hitting new highs.

Speaker 8: And I'm just wondering when you talk about component availability in the second half of the year.

And I'm just wondering when you talk about comp.

Component availability in the second half of the year.

Should we assume that the way you're catching up with component.

Speaker 8: Should we assume that the way you're catching up with the component ends could be alter ethical ideas

Your shipment accelerated into the second half would that be enough to support a 100 billion in <unk> I have a follow up.

Speaker 8: your shipment accelerate into the second half, would that be enough to support a hundred billion WFE? And I have a follow-up. Good, good before you thinking about whether that would boost your incomizzability up or

Yes, maybe that's a tough one I think.

Speaker 3: All indications from our customers are that 2022 and 2023 are going to be extremely strong.

All indications from our customers or the 2022 and 2023, we're going to be extremely strong.

Speaker 3: And if you take a look at the underlying fundamentals, they're very positive, right? So the trend towards 5G and artificial intelligence and Industry 4.0, etc., are driving some pretty strong secular growth.

And if you take a look at the underlying fundamentals, they're very positive right. So.

The trend towards.

<unk> and artificial intelligence and <unk>.

Industry, four <unk> et cetera are driving some pretty strong secular growth.

Speaker 3: I think the other trend that's important is many of the customers for chips.

I think the other trend that's important is.

Many of the customers for chips.

Speaker 3: are moving to a just in case inventory posture, which means not only just buying what they need but also putting some insurance in place from a parts standpoint. And finally, you've got the number of regions in the world trying to become self-sufficient in chips, which is driving even more equipment. So I think WIP is likely to grow.

Moving to adjusted case inventory.

Posture, which means not only just.

Just buying what they need but also putting some insurance in place from a parts standpoint and.

Finally, you've got the.

Number of regions in the world trying to become self sufficient in chips, which is driving even more equipment. So so I think.

Wi Fi is likely to grow.

Speaker 3: quite well in 2022. And probably as an industry, we're going to be limited by parts. So it hits us, it hits the hits the rest of the critical subsystem suppliers, and it hits our customers. And so you know, we all have to work together and make sure we get the parts we need to expand capacity in this.

Quite well in 2022, and probably as an industry, we're going to be limited by parks right. So it hits us it hits the <unk>.

Is the rest of the critical subsystem suppliers and it hits our customers.

So.

We all have to work together and make sure.

We get the parts we need to.

To expand capacity in this very important ecosystem.

Speaker 8: Thank you. Just a follow up to that. The same OEMs have a consistent message that this is secular and we are in a new paradigm shift especially with localization and WFC will continue to grow probably through 2025 and given that premises

Sure. Thank you.

Follow up to that.

Some Oems.

I have a consistent message that this is secular and.

We are in a new.

A paradigm shift, especially with localization and <unk> will continue to grow probably two through 2025 and given the premises.

Speaker 8: What are the opportunities, what would it take for your OEM customer to become a partner with you and co-invest for supply chain, for hub inventory management, so that once we come out of this later this year, both parties are able to help each other and benefit from this secular...

What are the opportunities what would it take for your OEM.

Customer to become a partner with you and co invest for supply chain hub inventory management. So that once we come out of this later this year.

Both parties are able to help each other and benefit from these secular trends.

Speaker 3: Yeah, Mitty, I think really it's not a question of money. You know, we have the ability to expand our own capacity relatively quickly and at relatively low cost. The issue is getting the parts, so it's really our suppliers expanding their capacity and their ability specifically to build more product at older nodes.

Yes.

Really it's not a question of money.

We are we have the ability to expand our own capacity relatively quickly and at relatively low cost.

The issue is getting the part so it is really are our suppliers expanding their capacity and their ability specifically to build more product at older nodes.

Speaker 3: So almost everything we buy is 28 nanometers to 180 nanometer type products. So it's mature and it's been in contention this year as the automotive industry came back to life and basically economies boomed around the world. So we're all fighting for that limited capacity. So what's happening today is we're seeing the IDMs make more investments in older nodes.

So almost everything we buy is 28 nanometers.

180 nanometer type products. So it's it's mature.

And it's been in contention. This year is the automotive industry came back to life.

Basically.

Condoms boomed around the world. So we're all fighting for that limited capacity. So what's happening today is we're seeing.

The ibms make more investments in an older nodes.

Speaker 3: And we're also seeing the same things happening at the foundries. So, you know, it takes some time to bring the capacity down, but it will come. And I think, you know, over the next 6 to 12 months, we're going to see things settle well.

And we're also seeing the same.

Things happening at the foundries. So it takes some time to bring the capacity down but it will it will come and I think over the next.

Six to 12 months, we're going to see things settle down.

Thank you Steve.

Welcome.

Our next question comes from the line of Tom definitely with D. A Davidson. Please proceed with your question.

Yes. Thank you for the question Steve just following up on <unk> question. So we think the Oems will require you to hold a larger inventory going forward or maybe have a larger hub inventory going forward.

Speaker 9: Yes, thank you for the question. Steve, just following up on Maddy's question, so they think the OEMs will require you to hold a larger inventory going forward or maybe...

Speaker 3: Well, yeah, I think that two things will happen. One is our OEM customers will rebuild their safety Fox and they may adjust those Fox a little bit to paint on their risk tolerance. So that's probably gonna be good news for us.

Well, yes, I think that two things will happen one is our OEM customers.

We'll rebuild their safety stocks and they may adjust those stocks a little bit depending on their risk tolerance. So that's probably going to be good news for us.

Speaker 3: The second is we're examining our own supply chain and where we can we're going to build inventory where we identify weak links. And we're also going to upgrade. So in many cases, you know, buying parts that.

Second is we're examining our own supply chain.

And.

Where we can we're going to build inventory.

Where we identify weak links.

And we're also going to upgrade.

So in many cases, we're buying parts that.

Speaker 3: or built in factories that may not have a long-term expansion plans. And so at that point, it's up to our engineers to upgrade the technology so that we're using parts that will be available and puntiful for many years to come. So those two actions will be proceeding this year.

Our built in factories that may not have long term expansion plans.

So at that point its up to our engineers to upgrade the technology.

So that we're using parks that will be available and plentiful for many years to come so those two actions will.

Be proceeding this year.

Okay, great and maybe just a little bit more color on the supply dynamics.

Speaker 9: and maybe just a little bit more color on the supply dynamics.

Speaker 9: When you get a slug of product like you did in the fourth quarter, is that driven by your core suppliers, is this giving you more allocation?

When you get a slug of products like you did in the fourth quarter is that driven by your core suppliers just give any more allocation are they actually produce anymore are you finding new suppliers or possibly even.

Yes.

Speaker 3: Well, in this case, it was a couple of our core suppliers who allocated more to us.

Well in this case it was a couple of our core suppliers, who allocated more to us.

Speaker 3: And there's a lot going on behind the curtain, quite frankly, that we don't see. But we were certainly happy to see the parts show up on our dock and we put them into products and ship those products very quickly. And I think that's the power of our model, which is we've maintained full staffing and full capacity throughout the company despite the parts shortage. So when we do get those upsides, we can turn them into revenue very quickly. OK, great. Paul, you talked a bit.

There's a lot going on behind the curtain quite frankly, we don't see but.

But we were certainly happy to see the pressure on our dock and <unk>.

We put them into products and ship those products very quickly.

And I think that's the power of our model.

Which is we have maintained full staffing.

Full capacity throughout the company. Despite the part shortage. So when we do get those upsides, we could turn them into revenue very quickly.

Okay, Great and then Paul you talked a bit about the telecom business being down a bit on a year over year basis.

Speaker 9: How much of that was your portfolio optimization versus...

Much of that was your portfolio optimization versus supply issues.

Speaker 4: It's both, but I think if you, I mean I'd have to think about it a little bit, but I'd say it'd probably be fair to say that it's half 50-50. You know, particularly in the fourth quarter a year ago, we had a very strong quarter in telecom and networking because we saw customers essentially buying ahead of products, ahead of price changes or phase outs.

It's both.

But I think if you I mean I'd have to think about it a little bit, but I'd say, it's probably fair to say that its half 50 50.

Particularly in the fourth quarter, a year ago, we had a very strong quarter and telecom and networking because we saw customers essentially buying ahead of products ahead of price changes to our or phase outs.

Speaker 4: And then as you recall in Q1 we moved to a lower number in the low 30s that we said was sort of a new baseline. Now we've had good demand off that new baseline this year that we've not been able to fill because of parts. And I think you saw a little bit of a glimpse of we got some parts in the fourth quarter and we were able to bring that number up. So it's a combination of both things occurring.

And then as you recall in Q1, we moved to a lower number in the low Thirty's that we said was sort of a new baseline.

Now we've had good demand off that new baseline. This this year that we've not been able to fill because of parts in it.

I think you saw a little bit of a glimpse of we got some parts in the fourth quarter and we were able to bring that number up so.

It's a combination it's a combination of both things.

Occurring.

Speaker 9: Okay, then last question here. When you look at the optimization, are you done with that process, or-

Okay and then last question here when you look at the optimization are you done with that process or is there still more to do.

I think in telecom and networking that's largely done.

Speaker 4: I think in telecom and networking that's largely done, we tried to do this optimization effort, which is kind of an ongoing effort.

We tried to do this optimization effort, which is kind of an ongoing effort.

Speaker 4: to kind of feather it in and blend it in. We don't want to put any of our customers in a difficult situation.

Kind of feather it in and blended and we don't want to put any of our customers in a difficult situation.

Speaker 4: We are trying to do this in a bit of an elegant way. I just think in that particular market, it ended up being more visible around that calendar year-end but we are constantly looking at how do we improve our portfolio, how do we raise prices in areas.

Trying to do this in a bit of an elegant way I just think in that particular market. It ended up being more visible around that back calendar year end, but we're constantly looking at how do we improve that portfolio, how do we raise prices and areas.

Speaker 4: We have lower margins, how do we focus our engineering resources on areas that have more differentiation. So I'd say it's more of an ongoing process, but it shouldn't be as visible overall as what we saw in telecom and networking last year.

Where have we have lower margins, how do we focus our engineering resources on areas that have more differentiation.

So I'd say, it's more of an ongoing process, but it shouldnt be as.

As visible overall is what we saw in telecom and networking last year.

Okay. Thank you both for your time.

Okay.

And our next question comes from the line of Pavel <unk> with Raymond James. Please proceed with your question.

<unk>.

Speaker 10: Thanks for taking the question. Mine are actually not about the supply chain, believe it or not. We're in the third year of COVID and I wanted to ask what is the

Thanks for taking the question.

Mine are actually not about the supply chain and believe it or not.

Ian.

We're in the third year of Covid.

And I wanted to ask what is the.

Speaker 10: kind of near-term outlook for medical, or the medical component of your industrial and medical segment. So are you seeing any deceleration in healthcare application demand?

Kind of near term outlook for medical.

Or the medical component of your.

Industrial and medical segment. So are you seeing any deceleration in healthcare application demand.

Speaker 10: as the pandemic, you know, kind of subsides, so to speak.

As the pandemic.

Subsides so to speak.

Yes, we're seeing indications of <unk>.

Speaker 3: Yeah, we're seeing indications of increased activity, both on the revenue side as well as the design side. And so we're quite happy with the level of design wins that we're earning in that market. And also we're seeing medical revenue pickups. I think 2022 will be a good year for the medical market and a good year for us.

Increased activity both on the revenue side as well as the design side.

And so we're quite happy with the level of design wins that were earning in that market.

Also we are seeing.

Medical revenue pick up so I think 2020 to be a good year for the.

The medical market and a good year for us.

Speaker 10: Okay, interesting. That's a little counterintuitive.

Okay interesting.

Low counterintuitive.

Speaker 10: And then on the on the dividend, so I guess this quarter marks the 1 year mark.

And then on the.

Dividend, So I guess this quarter marks the one year Mark.

Speaker 10: of your institution of a dividend.

Of your.

Institution of a dividend.

Given that the yield on the stock obviously.

Speaker 10: Given that the yield on the stock obviously is pretty moderate.

It's pretty pretty moderate 50 basis points.

Speaker 10: any perspective on, you know, moving to a progressive dividend policy or just any thoughts on that front?

Perspective on.

Now moving to our progressive dividend policy or just any thoughts on that front.

Speaker 4: Yeah, it's a good question. You know, broadly speaking, when we put out our model, we said we'd sort of assign a portion of our cash flow to the dividend. Generally speaking, we said we'd review that periodically over time, which the board does. At this point, we haven't made a decision to increase the dividend. Certainly, the company can perform at a higher level. We want to make sure we have cash in the right places.

Yes, it's a good it's a good question.

Broadly speaking when we put out our model, we said we sort of.

Sign a portion of our cash flow to the dividend Gen.

Generally speaking, we said we would review that periodically over time, which the board does at this point, we haven't made a decision to increase the dividend.

Certainly.

The company can perform at a higher level you want to make sure we have.

Cash in the right places.

Speaker 4: and we've not increased the dividend at this point. Certainly that's something that we could continue to look at over time, but at this point, given the parts constraints, we've not increased the dividend.

And we've not increased the dividend at this point certainly that's something that we can continue to look at over time, but.

But at this point given the parts constraints, we've not increased the dividend.

Okay I appreciate it.

Hum.

And as a reminder, if you have any questions you May press star one on your telephone keypad to join the question queue.

Our next question comes from the line of prior to US Let me start with Beringer Bahrenburg. Please proceed with your question.

Thank you and good afternoon.

Speaker 2: Thank you and good afternoon. So, besides some of these supply chain issues that are impacting your margins at the moment, are there actions that are under your control that can potentially help as well? For example, manufacturing footprint optimization and other cost cut measures.

So besides some of these supply chain issues that are impacting your margins at the moment are there actions that are under your control that can potentially help as well for.

For example, our manufacturing footprint optimization and other cost cutting measures.

Speaker 3: I'll make a comment and then turn it over to Paul. I think when you look at our costs, the great majority of the costs are in the bill of materials. There's not that much we can do trying to optimize manufacturing footprint that offsets the parts cost.

I'll make a comment and then turn it over to Paul.

I think when you look at our costs.

The great majority of the costs are in the bill of materials, and so theres not that much we can do trying to optimize manufacturing footprint that offsets the parts costs.

Speaker 3: In fact, we don't want to do that because we see a lot of opportunities to expand our manufacturing once the parts shortages are rectified. And so we're probably going the other way. We're probably going to build more capacity. It's relatively cheap. This is a factor where we're building boxes and shipping those boxes after we test them. It's not a wafer fab, right? It's not a clean room. It's relatively inexpensive capacity to build.

In fact, we don't want to do that because we see all of them.

Our opportunity is to two.

To expand our manufacturing once the parts shortages are rectified.

So we're probably going the other way, we're probably going to build more capacity, it's relatively cheap.

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The fact that we're building.

Boxes.

And shipping those boxes. After we test them, it's not a wafer fab right. It's not a clean room. It is relatively inexpensive capacity bill.

Speaker 4: I'll just add a couple comments. You know, Steve's exactly right. I would add however that this environment where you're struggling with full kits is quite disruptive.

Yes, I'll just add a couple of comments.

Steve is exactly right.

Add however that this environment, where you're struggling with full kits is quite disruptive.

Speaker 4: and it consumes a lot of time on the supply chain side.

And it consumes a lot of time on the supply chain side.

Speaker 4: and it's quite disruptive in the factory. So we do believe that as the environment improves, there continue to be opportunities for us to also improve the efficiency of our operations. And that's something that we continue to focus on. You know, we are carrying, you know, some additional cost from the factory that we're exiting in China so that we can have some of that capacity in place. It's not very efficient right now, but it does add ability for us to output more.

And it's quite disruptive in the in the factory. So we do believe that as the environment improves there continue to be opportunities for us to I'll say improve the efficiency of our operations and that's something that we continue to focus on.

We are carrying.

Some additional cost from the factory that we are exiting.

In China.

So that we can have some of that capacity in place that's not very efficient right now, but it does add ability for us to output more so I think over time, there'll certainly be opportunities for us to improve efficiency.

Speaker 4: So I think over time there will certainly be opportunities for us to improve efficiency.

Speaker 4: As it relates to cost, a lot of these increased costs right now we think are transitory. They're in the form of these.

As it relates to cost a lot of these increased costs right. Now we think are transitory or in the form of these.

Speaker 4: material premiums that we're paying. Unfortunately, we're starting to be able to pass those on. It doesn't help gross margin percent, but...

Material premiums that we're paying unfortunately.

And to be able to pass those on it doesn't help gross margin percent, but but over time those will abate.

Speaker 4: But over time those will abate and that should improve our margin significantly.

And now it should.

Prove our margins significantly now there's also some structural inflation in material cost and we think by and large will be able to recover that largely through through price price increases over time. So we do think there is a clear path to get back to our model of gross margins of 40% or better.

In fact, we believe we can be very close to that as an exit rate. This year, assuming we see some of that some of the abatement we've talked about in the.

And the supply environment.

Speaker 2: Got it, thanks for that. And then this new next generation 48V power shelf, how should we think about the potential for that product? How many other competitors can make a similar product?

Got it. Thanks, Thanks for that and then this new next generation 48 or our shelf.

Should we think about the potential for that product.

How many other competitors can make.

Some of our product.

Speaker 3: I would say we're one of the first out there with a 48 volt power supply for this level of efficiency and power density. So I think it more than meets the needs of the leading customers in the hyperscale market. So we think we're well positioned with this platform to move forward and to do further customization to meet our customers' needs.

I would say we were one of the first out there with a 48 volt power show for this level of efficiency and power density.

I think that more than meets the needs of the leading customers in the hyperscale market. So we think we're well positioned.

With this platform.

To move forward and to do further customization.

To meet our customers' needs.

Speaker 2: Okay, and the last one for me is just on the capex plans for this year. Any large project we're flagging?

Okay and the last one from me just on the Capex plans for this year.

And in large project work.

Flagging.

Speaker 4: You know, we always have a variety of things. Steve talked about some facility improvement, potentially some capacity increases around equipment. But look, our CAPEX needs are pretty low. And I expect we'll stay within our model of 2% to 3%. We don't see anything that would drive us significantly beyond that. 2% to 3% of revenue. Got it.

We always have a variety of things Steve talked about some facility improvement potentially some capacity in.

Increases around equipment, but look our capex needs are pretty low and I expect we'll stay within our model of two years to 3%.

So we don't see any anything that would drive us significantly beyond that.

2% to 3% of revenue.

Got it thanks guys.

And our next.

Question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.

Speaker 6: Thanks for the follow-up. I know industrial and medical has been a focus for share gains and growth and as you've gone through this team reorganization have you seen those order rates accelerate or can you talk about book to bill rates for I&M versus the other segments or versus prior year however you want to

Okay. Thanks for the follow up.

I know industrial and medical has been a focus for share gains and growth and as you've gone through this team reorganization have you seen those order rates accelerate or can you talk about book to bill rates for ion am versus the other segments are versus prior year. However, you want to frame it.

Yes, we're not ready to get into that level of detail, yet, Steve, but what I can say is we are.

Speaker 3: Yeah, we're not ready to get into that level of detail yet, Steve, but what I can say is, you know, we have significantly increased the number of engineers designing products for the industrial medical market. So we are seeing increased output already. That's going to continue to increase in the coming quarters.

<unk> significantly increased the number of engineers designing products for the industrial medical market. So we are seeing increased output already.

The increase in the coming quarters.

Speaker 3: The second thing we've done is really refocus a significant part of our sales and FAE force on industrial medical applications.

The second thing we've done is really refocus a significant part of our our sales force on industrial medical applications.

Speaker 3: and so that the pipeline is getting bigger. We're definitely encouraged because this is really right in our wheelhouse. These are long life cycle, typically sole source type products. And that's what we're good at.

So the pipeline is getting bigger.

We're definitely encouraged.

Because this is really right in our wheelhouse leisure long lifecycle.

Typically sole source type products and that's what we're good at.

Speaker 4: I was just going to say, just commenting Steve, this was a record quarter for Industrial Medical from revenue. Steve commented on his prepared remarks and we also noted that backlog increased again for these products. So clearly there is a lot of demand, we are winning new positions and as we get parts there is a lot of room for revenue growth here.

Yes.

Oh go ahead I was just.

I'm going to say just commenting Steve it just.

This was a record quarter for industrial medical from revenue Steve commented that on his prepared remarks, and we also noted that backlog increased again.

For these products, so clearly theres a lot of demand we're winning.

New positions and and and as we get parts, there's a lot of room for revenue growth here.

Speaker 6: Yeah, that was my follow-up. For the industrial side, are you targeting niche manufacturing of really specialty products? On the medical side, is it really medical device manufacturers? What's the kind of the approach?

Yes that was my follow up for the for.

The industrial side or are you targeting niche manufacturing of really specialty products are and on the medical side is it really medical device manufacturers are what's the what's kind of the approach that you're taking.

Speaker 3: Yeah, Steve, I would say, you know, most of the opportunities here are going to be small and medium sized opportunities. So we fill out a singles and doubles in the industrial medical market, but the opportunities last for a long time. So we're able to build upon them at each of these customers. So that's really kind of business it is and it tends to average effort corporate growth margins. So that's why we've put so much horsepower behind the effort. Yeah, so it mixes you up as that growth accelerates. ed.

Yes, Steve I would say most of the opportunities youre going to be small and medium sized opportunities. So it's a lot of singles and doubles and the industrial medical market, but the opportunities last for a long time.

So we were able to build upon them in each of these customers.

So that's really kind of business it is and it tends to average up our corporate gross margin. So.

That's why we've put so much horsepower behind that effort.

Yes, so it mixes you up as that growth accelerates.

Yes.

Got it thanks.

And we have reached.

The end of our question and answer session and therefore, I will now turn the call over to Steve Kelley for closing remarks.

Speaker 11: you

Speaker 3: Okay, thank you. A few closing thoughts. First, demand for our products is very strong.

Okay. Thank you a few closing thoughts.

First demand for our products is very strong.

Speaker 3: Second, as supply conditions improve, we expect to drive improved financial performance.

Second as supply conditions improve we expect to drive improved financial performance.

Speaker 3: And finally, we are focused on accelerating the execution of our strategy.

And finally, we are focused on accelerating the execution of our strategy.

Speaker 3: to bring best-in-class precision power solutions to customers in our target markets. Thanks for joining the call today.

To bring best in class precision power solutions to customers in our target markets and thanks for joining the call today.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Speaker 12: The Newurse you

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Yes.

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