Q2 2022 Advanced Energy Industries Inc Earnings Call
Greetings and welcome to the advanced Energy second quarter 2022 earnings call.
At this time all participants are in a listen only mode. A brief question 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.
As a reminder, this conference being recorded.
It is now my pleasure to introduce your host Edwin Mok VP of strategic marketing and IR. Thank.
Thank you you may begin.
Thank you operator, good afternoon, everyone welcome to advanced Energy's second quarter 2022 earnings Conference call.
We today are Steve Kelley, our president and CEO , and Paul Oldham, Our executive Vice President and CFO .
Before I begin I'd like to mention that we will be participating at several investor conferences in the coming months.
If you have not seen our earnings press release and presentation, you can find them on our website at IR Dot advance energy Dot com.
Let me remind you that today's call contains forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future for governments.
Information concerning these risks can be found in our SEC filings.
All forward looking statements are based on managements estimates as of today.
August <unk> 2022 and accompany assume no obligation to update them.
Medium term targets and long term aspirational goals presented today should not be interpret S guidance.
On today's call all financial results are presented on a non-GAAP financial basis, unless otherwise specified.
Exclude from non-GAAP results, all stock compensation amortization acquisition related costs 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.
With that let me pass the call to our President and CEO , Steve Kelley.
Thanks, everyone Hello, everyone and thanks for joining the call.
Second quarter revenue and earnings per share surpassed our expectations.
Largely due to improved supply of key components.
And good execution by our operations team.
While delivering record breaking revenue.
We also significantly grew our backlog.
This is evidence of the strong demand across our target markets.
In the near term.
The primary constraint on our financial performance.
We will continue to be the availability of scarce components.
Particularly integrated circuits.
Well their procurement of scarce Ics is key to our short term performance.
New products and technologies are key to our long term growth.
To that end our.
Our development teams are highly focused on launching innovative products.
Into our target markets.
Within those markets, we're focusing on applications.
Which need highly engineered solutions, allowing.
Allowing us to deliver more value to our customers.
In addition.
We are accelerating the cadence of new product introductions across a wide range of applications.
In the second quarter.
We expanded our reach in the medical power market.
By acquiring S empower.
We are now a top player in medical.
And aspire to become the number one player.
Within the next five years.
Customer reaction to the acquisition has been positive.
They recognize that advanced Energy's engineering capabilities.
Manufacturing footprint.
And strong balance sheet complement the innovative strength of S. L power.
Now let me provide some further color regarding the current operating environment.
As I mentioned earlier the supply environment remains dynamic.
The availability of key Ics.
All of which.
Are built on older process nodes is the primary issue.
To partially mitigate the shortages.
We buy certain components through dealer.
Broker channels.
Our customer support this effort by absorbing some of the price premiums associated with these broker buys.
While there are pockets of delivery improvement.
We expect that the overall procurement environment.
We will remain challenging in the near term.
We're also mitigating supply issues by working closely with customers to qualify alternative Ics.
Where necessary.
We have redesigned entire circuit boards to eliminate hard to find components.
These alternative ic's.
And redesign circuit boards.
Contributed to our results in the second quarter.
It should have an even larger impact on our second half performance.
We continue to maintain surge capacity throughout our factory network.
This allows us to quickly take advantage of lumpy deliveries scarce components.
Now I'll provide more details for each of our target markets.
In the second quarter.
Revenue from the semiconductor equipment market.
Grew 30% year on year.
And 13% sequentially.
To nearly $230 million.
This is a new quarterly record for advanced energy.
We continue to expect that advanced Energy's semiconductor revenue.
We will grow faster than W. F E in 2020 two.
Our strategic development programs for dielectric etch and remote plasma source applications are progressing well.
Enabling us to deliver evaluation units to our key customers.
In addition.
We secured multiple design wins for high voltage power conversion products.
We believe that these strategic programs and products will.
We'll drive long term revenue growth and market share gains for advanced energy.
In the industrial and medical market.
Revenue grew 26% year on year.
And 27% sequentially.
Due to improved parts availability.
As well as the addition of S L power.
Our industrial and medical order book.
Increased in the second quarter.
We secured a major wins at multiple tier one medical Oems.
And one key design slots and indoor farming.
Factory automation.
And industrial printing applications.
In the second quarter, we expanded our thin film industrial portfolio.
By introducing a new digitally.
Digitally controlled RF generator.
Together with an enhanced matching network.
Year to date, we have launched a variety of other new products into the industrial and medical markets.
Including several board mounted power modules.
A number of certified medical products.
A new parameter for industrial temperature measurement.
And our software solution for indoor farm lighting called grow insight.
Since the acquisition of S. L power in April .
We have combined the medical power development teams of S O power.
And advanced energy under a single leader.
This combined team.
Is now in a position to deliver a broader range of power delivery solutions to our medical customers.
Since the acquisition, we are seeing an increase in medical power design activity, particularly in regions outside the U S.
In the data center computing.
Telecom and networking markets demand is solid.
But revenue continues to be paced by the supply of critical Ics.
During the quarter.
We won several high value designs in these markets.
To summarize.
Demand for our products remained strong.
Although the availability of scarce components continues to be the primary constraint or.
Our mitigation efforts are having a positive impact.
We believe that we are on track to deliver double digit percentage revenue and earnings growth in 2022.
Looking beyond this year, we are encouraged by customer acceptance of our new products and technologies, which.
Which we expect.
It will drive improved revenue.
Market share in earnings.
In short, we believe that advanced energy is well positioned.
To deliver sustained profitable growth in the coming years.
Paul will now review our financial results.
And provide detailed guidance.
Thank you, Steve and good afternoon, everyone in the second quarter, we delivered record revenue of $441 million and earnings per share of $1 44, surpassing our guidance ranges.
Demand for our products remains strong and our backlog grew 15% sequentially to $1.17 billion.
We believe this backlog, which is comprised of predominantly proprietary products provides a runway to solid financial performance as we look over the next several quarters.
Our operations focus remains on securing critical parts and getting products to customers as quickly as possible.
Our redesign efforts ability to move quickly to secure parts, even at a premium and other mitigating actions are having a positive impact.
At the same time, the overall supply environment remains very challenging and we continue to see higher material costs and premium recoveries.
As a result, we will remain prudent in our planning, but I believe our second quarter results are indicative of our ability to achieve our target earnings of over $1 50 per share by the end of the year.
Now let me go over our financial results.
Revenue of $441 million grew 22% from last year and 11% from last quarter.
Excluding the contribution of the S. L power acquisition organic revenue growth was 18% year over year and 8% sequentially.
Revenue from the semiconductor market was $229 million up 30% from last year and 13% from last quarter.
Demand was strong and our backlog grew despite the record revenues.
We are working closely with our customers to prioritize critical parts and deliveries and expect our semiconductor revenue to grow sequentially again in both the third quarter and second half.
Revenue in the industrial and medical market was $105 million growing 26% from last year and 27% from last quarter.
Excluding S. L power organic growth was 12% both year over year and sequentially driven by strong market demand and improved supply of critical Ics.
Revenue in both data center computing, and telecom and networking continued to be meaningfully impacted by supply of critical components.
As a result data center computing revenue was flat to last year at $69 million, but declined 9% sequentially.
Telecom and networking revenue was $38 million up 19% from last year and 8% from the first quarter.
Gross margin in the second quarter was 37, 1% up 50 basis points sequentially on better mix and increased factory output.
Compared to last year gross margins declined 90 basis points due to higher material costs.
Premium recoveries, which reflect costs that we have been able to pass onto our customers, but at zero margin were similar to Q1 on a dollar basis and impacted gross margins by approximately 160 basis points.
Given the dynamic supply environment, we expect that higher material costs and related premium recoveries will continue to negatively impact our gross margins in the third quarter and could extend further.
Although we believe our mitigating actions should help offset some of the impact given these challenges we will take a more conservative approach to our cost assumptions over the next couple of quarters.
Operating expenses were $94 million up 14% from last year and 8% from last quarter the sequential.
<unk> increase was largely due to the addition of S. L power and annual salary increases which occurred in the second quarter.
Second quarter operating margin was 15, 8%.
Depreciation for the quarter was $8 $5 million and our adjusted EBITDA was $78 million up from $62 million last year, and 66 million last quarter.
non-GAAP other expense was $2 $2 million, including $1 $5 million of interest expense and a $700000 of foreign exchange losses.
Our non-GAAP tax rate was 19.4% slightly above our target of 19% and ahead of our historical rate of 15%.
The higher rate is due primarily to the change in U S tax rules impacting the expensing of R&D that took effect at the beginning of the year.
Second quarter earnings were $1 44 per share up from $1 25 last year and $1 24 last quarter.
Excluding the negative impact of the change in U S tax rules earnings in the quarter would have been greater than a $1 50 per share.
Now, let me comment briefly on the S. L power acquisition.
And our first partial quarter as all contributed $12 $9 million in inorganic revenue and approximately five cents and non-GAAP earnings per share.
This acquisition makes us a top player in the medical market and we are well on our way to capture cross selling revenue opportunities and to integrate the business.
Turning now to the balance sheet and cash flow.
We ended the fourth quarter with total cash, including marketable securities of $375 million and net debt of $8 million.
The quarter, we paid approximately $145 million for S. L power.
And we repurchased $17 million of common stock at $74 12 per share.
Cash flow from operations was $38 million.
Net working capital improved slightly to 119 days DSO.
DSO improved modestly to 55 days and Epo declined slightly to 64 days.
Inventory turns remained about flat at two eight times.
As we begin to see the impact of our actions to scale back inventories of less critical components.
In the near term, we expect inventory to remain elevated but turns should improve as we consume inventories of less critical parts contributing to higher cash flow over the next several quarters.
During Q2, we invested $12 $4 million in capital expenditures made debt principal payments of about $5 million and paid $3 $8 million in dividends.
In addition, today, we announced that our board of directors increased our stock repurchase authorization to $200 million in support of our long term opportunistic share repurchase strategy.
Since our last authorization a year ago, we repurchased approximately $95 million of stock at an average price of $83 50 per share through the end of the second quarter.
Now, let me turn to guidance.
Although we continue to see strong demand for our products, we remain in a dynamic supply environment with low visibility to the delivery of critical parts and ongoing material premiums for some components.
As a result, we expect Q3 revenue to be approximately $435 million plus or minus $25 million.
Our Q3 guidance assumes semiconductor revenue will continue to grow sequentially and includes a full quarter of revenue contribution from S. L power.
Q3 gross margin is expected to be about flat to Q2 levels as higher material costs persist into the third quarter.
We expect operating expenses to be in the $97 million to $99 million range, primarily and a full quarter vessel power operating expenses.
We expect other expenses to be approximately two and a half million dollars on higher interest expense and our tax rate to continue to be approximately 19%.
As a result, we expect our Q3 non-GAAP earnings per share to be $1, 30, plus or minus 30 cents.
Let me finish with some closing thoughts.
And our second quarter, we executed well in a challenging environment.
And although supply chain constraints will continue to pace our performance. Our Q3 revenue guidance reflects four consecutive quarters of year over year revenue growth.
Increasing our confidence to achieve our year end annualized earnings targets of $6 per share despite persistently higher material costs.
Looking forward, we believe that solid demand drivers in our markets the profile of our order book.
Actions, we are taking to mitigate supply chain challenges and investments in new products position us well to deliver on the pent up earnings potential for the company for many quarters to come.
With that let's take your questions operator.
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Our first question comes from Scott Graham with loop capital markets. Please proceed.
Yes, some hi, good afternoon, congratulations on a nice quarter guys.
Thanks, a lot.
Okay sure.
I was hoping you could unpack the semiconductor growth up 30% year over year.
Just give us a little bit more color on.
And maybe some product lines that were maybe outsized strength.
And the like.
Yeah, Scott, let me make a few comments there.
Like the rest of our markets our semiconductor market was really constrained.
It has been for the better part of the last year.
So what happened in the second quarter was we were able to procure more birds.
Internally prior to booking into revenue.
There's really no meaningful change in the demand pattern, we're seeing demand exceeds supply.
Throughout our semiconductor business.
I should.
And though that some of the work we started last year.
Qualifying alternative ICT.
And re qualifying.
Circuit boards is starting to pay off in a big way for us starting Q2 and.
Going into the second half of this year so.
A big thank you to our customers for working closely with us to make those calls.
Okay. So there are no particular areas of semi.
Were you were maybe a little bit stronger byproduct line it was pretty broad based in semi.
Yes, it's very broad based again, it's supplied limited and customers are taking just about everything we can ship.
Great on the datacenter side, you know you have a really good business there.
As of March However, that you know half a dozen companies are saying that it's fine and maybe another half.
Yeah.
Hey, it's.
Weakening or will potentially weaken.
Tying things back sometimes even to the to the smartphone market. What are your customers are saying and data centers I mean.
Are your customers.
In particular still have plans to have continued to build in.
In the second half of the year and on into next year.
Give us an idea of what's going on in that market.
Yes, Scott, we see a lot of strength in that market and again, there's still a supply constrained market.
So they're taking everything we can build I think the only thing we've seen in that market is that some customers are waiting for.
Other components to complete their rack.
So where we run into reported basins in the market.
Able to quickly ship those products to a different customer so so far.
We have had no constraints.
Microscale market and.
We're just being expedited on daily basis from these customers.
And if I could just sneak one last question in here.
If you don't mind your chart on page six is pretty telling you the growth of the backlog has been like a weed.
I guess the concern that I would have there is you know is there a percentage of that you think might be you know double ordering first available.
Getting into slots and what have you how much of that backlog is do you think is real.
OEM order versus maybe.
Some double ordering in there and what is the potential that you know what.
Closing in on $1 $2 billion that you know.
If demand weakens in the semiconductor markets as I think most people believe it is in salt and in a lot of pockets that theirs.
Some cancellations there.
Yes, that's a good question Scott and we take a look at that backlog very closely because it is at an all time high.
So let me just give you some more data to support the integrity of that backlog.
First of all two thirds of that backlog that we have currently.
Is shippable in the next six months. So it's got customer request dates within the next six months, which is important to note because that means it's demand that's right in front of us.
If I take a look at our backlog and addressing specific to your question about the perishability.
80% of our backlog is.
For the semiconductor industrial and medical markets.
Nearly all of that sole source and we believe that all of that.
Is earmarked for specific.
So we don't think theres much its paresh.
The part that is <unk>.
First of all as the as the Hyperscale backlog right, because that's a business where there's more than one supplier for every one of those.
Those boxes.
And so we track that very closely as.
As the riskiest part of our backlog, but it only represents 10% of the dollar value of our backlog.
So thats, where we take a very cautious approach on buying piece Burton integrated circuits.
Hyperscale or.
So we make sure that we're covered so we don't get.
Left with unsold inventory.
Thank you Steve.
Youre welcome.
Our next question comes from Chris <unk> with Cowen. Please proceed.
Hi, Thanks for taking my question I drove them posted on Steve.
I'm just kind of curious you know.
People do worry about next year and in the macro and everything but your numbers, obviously very impressive and good but at the same time your customers like Lam, who reported last week are growing the inventory.
I'm just kind of curious.
The amendment slowdown happens is it fair to assume you might see it before your semi cap customers because they would rather drawdown from their own inventory versus buying from you.
Okay.
Okay.
I recently spent a lot of time with our major customers and semiconductor almost all of them and the best month in.
And the message was very clear ship us more in the second half.
So they see.
Demand is solid through 2023 and into 2024.
And.
Their biggest issues are basically parts issues typically its not advanced energy anymore as other suppliers.
And so.
The nice part about that market is with our biggest customers.
We work off a pub inventories.
And so even if there is no specific need for a product today, we can still ship the product.
Two the customer they'll put into inventory and then they can turn that when they need it.
So were in addition to filling.
Real demand today, we're also replenishing the hubs that are major semiconductor equipment customers.
So we feel very good about our ability to keep shipping at a higher rate into those customers.
Well into 2023.
Got it got it very helpful.
And then a quick follow up for.
Paul.
Just a hypothetical question just on operating leverage if for some reason.
Revenues are down next year, let's say, five or 10% or whatever it might be at risk.
Curious how to think about the leverage in the model now that you also have absolute power added onto your portfolio.
Yes, it's a good good question, Chris I mean, I think our operating Leverages and 40% to 50% range on the downside it would probably run a little bit higher than that but that remember at our gross margins. The majority of our costs are variable costs and so.
Yes, I mean, I have as big of impact on us as companies have a large a large fixed cost base clear.
Clearly there are some things that we can do to manage our expenses. If in fact, we saw revenues lower including one of those and that every person in the company is on variables APAC type program.
Theres certainly Greg all expenses that we can.
That we can manage down.
At the same time as we mentioned before.
We do think that the nature of this.
Of this cycle is a little different in that it's a supply constrained cycle.
And.
If you look at our inventories our inventories around to interrupt because we're waiting on critical parts and we found that we see a lot of that and our customers.
We had higher inventories, but Dan the iron toys are things modeled a professional parts people to ship the product.
So we.
We do think our backlog provides us some runway as we look forward.
Even in a softening advanced demand environment, where we believe customers will take the equipment to replenish.
They're all in jet or hub inventories or areas, where they've had to borrow from places T. J just meet their on their on demand today.
Got it very helpful. Thanks, a lot Paul appreciate it.
Yes.
Our next question comes from Amanda <unk> with Citi. Please proceed.
Okay.
Hi.
Clarification question in terms of the impact of the new design.
Restructuring component versus sort of general supply ethane, where did you see sort of I think its benefit in the quarter in terms of outcome.
All formats.
Yes, Amanda I would say that there's probably.
The biggest benefit in the semiconductor area.
That's where we saw the biggest.
Yes.
Or has the ability to turn more.
More revenue.
Due to these alternative by sequels and the board Redesigns within semiconductor.
Okay.
And then in terms of your Capex plan going forward.
I know theres plan to sort of shrink some of the capacity in Asia.
But with the chip packaging and including equipment suppliers does that change how you look at capacity in the U S or through your general capacity footprint.
Or are you more concerned about just sort of right sizing the business at this point.
Yes, so so we're going to expand capacity Amanda This is Jeremy puts and takes where we closed some factories and open new ones, because we're modernizing our operations, but I think youll see us.
Significantly expand capacity in the coming years, particularly in Asia.
Regards to the chip back the Chimps Act.
We don't see any direct benefit we don't expect to get any grant money or.
Investment tax credits.
As a result of that Bill. However, we believe that our customers will benefit significantly from that so that it's good for our customers is good progress energy.
Thank you.
Youre welcome.
Our next question comes from Quinn Bolton with Needham. Please proceed.
Hey, guys. Congratulations on the results and the outlook I guess I've got a question about the broker channel as I've heard more about it it sounds like in order to win business in that channel you often have to commit to.
Not only the higher prices, they're asking but also minimum commitments, which might fulfill your needs for multiple quarters and so as you guys look at the supply constraints can you just sort of talk to us about.
You go into the broker channel are you sort of committed to buy at these higher prices for several quarters.
Which will keep that premium cost or that drag on gross margin.
Hi through early next year and if that's the case do you also see sort of just.
Kind of game of whack, a mole where component shortages one quarter. It's MOSFET next quarter. Its pld's next quarter, it's something Allison so even though you might have.
These <unk>.
Supplies from the broker channel one quarter.
Critical need comes up to next quarter and you've got to go back for a different type of components.
Yes, a good question.
And I would say first the nature of our buys from the broker channel tend to be.
Driven by immediate needs not trying to fill material slots per out.
Multiple quarters, and frankly, you can't get that many parts from these channels.
Much more of an opportunistic buys in that and they usually might ISO go from anywhere from a month to a handful of months. So I don't think there is.
Along with that we bought parts that will be consuming for a long period of time, they tend to be consumed pretty quickly I think kind of come in the door and right out because.
Because of the critical parts that we're looking for.
But your second comment.
It is a little bit of a game of whack, a mole and Theres certainly some components, where supply has gotten better we've been able to get longer visibility and supply and other parts of that show up you know that hasn't been a problem our problem because there was a yield issue or there was some other issues in the supply chain and now are not equal to or not able to get parts.
I do think that the nature of these these broker buys being sort of both necessary and opportunistic is that this activity will abate as the general supply chain improves.
We haven't we haven't seen that yet in our comments, we talked about we expect that to persist into the third quarter.
But we don't see this being a long term pattern.
Over time, it will improve as the supply chain normalizes.
And then sort of related to my second question do you expect the broker or the premium buys to have that same relative to 160 basis point impact.
In the third quarter as it did in sort of Q1 and Q2 and then a second question I think you mentioned youre keeping the Shenzhen facility open for longer to maintain that surge capacity can you give us any update on your thoughts about when you may be shutting down that that line as things get back to more normal conditions.
Thanks.
In general as we said, we're seeing the higher material costs persist into Q3, so while we didn't say specifically on the broker buys which can vary a little bit but broadly speaking I would say in the same range probably makes sense.
Yes.
It's obviously something that's dynamic and can increase or we can see it improve depending on how the broader economy environment goes with respect to Shenzhen, we do expect to close that by the end of the year.
And we'll keep that capacity and as Steve said, we are adding capacity and part of that rebalancing is to ensure that we've got adequate capacity.
Our sites as debt as Shenzhen closes to ensure.
Only to maintain but grow our semiconductor revenue.
And Paul excited about a 50 basis point drag for <unk> is that the right ballpark.
Yes, I think thats the right that's in the right range.
Great. Thank you.
Okay.
Our next question comes from Steve Barger with Keybanc. Please proceed.
Hey, good morning.
Good afternoon, sorry.
It sounds like you're expecting continued strong growth when you think about what youre seeing in end markets and just the mix that you have in backlog do you expect semi equipment continues to show higher organic growth rates that.
But industrial and medical as you go into next year or do tougher semi comps make that slip.
Yes, Steve.
We do expect to see semi seem to be strong through 2023.
We think that was actually government potential because.
It's been really restrained by a lack of parts.
And it tends to be more of a high mix low volume.
Business for us.
I think as we are able to get more parts for the industrial medical business Youre going to see quite an uptick.
In the industrial medical space.
That's great and you know really good to see your confidence in more than $6 and run rate earnings in <unk>, given that strong demand environment and your comments on backlog is that $1 50 per quarter, plus kind of a minimum base case going into next year as you think about the first half.
Assuming you can get all the parts you need to ship.
Yes, I think assuming we can get the parts to shift there is there is upside to that number so it all comes down to the.
Constraints in supply environment, and as we commented we've seen demand remains strong.
And given the proprietary or sole source nature of the backlog.
We still continue to operate in a supply constrained environment, even if we saw demand soften a little bit ironically, some softening in macro demand might actually help the parts situation, which would which would benefit us as we go into next year. So.
We're keeping a close eye on it but we do believe that the combination of strong markets and.
Our backlog profile gives us continued upside all based on where we're at from a parts perspective.
And if I could just ask one kind of related question to your comment about if things were to slow you mentioned that you are pushing to accelerate the cadence of new product introduction is that a function of increasing R&D spend or is there some internal processes, you're streamlining to get things to market faster.
It's a combination we are certainly spending more money in R&D to accelerate.
Our technology development.
So from a product standpoint, it's really high.
We're going to market so we've.
We've organized into business units.
Which are highly focused on our target markets on semiconductor industrial and medical and I think between the two.
That's what's causing us to get our new product.
And it's very important for us to continue with that.
<unk> cadence as we go into 2023.
Thanks.
Thank you Steve.
Our next question comes from Hans Chung with D. A Davidson. Please proceed.
Alright. Thank you for taking my question congratulation on the strong retail.
First can you kind of give me some color around it.
Industrial and medical has taken that.
During the second quarter I know that there are contributions from power bi.
We also see very strong organic growth.
Just kind of curious about what was the driver.
And any color around that.
Okay.
Yes, so a couple of comments I noted in my remarks sort of the organic and inorganic growth.
So you did have a strong quarter in industrial and medical and that's driven by strength across a number a number of vertical and Steve mentioned several of those in his commentary around lighting indoor farming.
And more broadly in general industrial and medical demand has been strong.
And it's all about the parts of that.
We grew backlog again in the industrial and medical products and it's across multiple areas.
We did at SL power of this quarter as I mentioned, it added $113 million of revenue.
And was clearly accretive for us for the quarter and we do think the combination of DSL power products and <unk>.
People that joined us as part of that acquisition.
As well as the breadth expansion of channel combined with our with our existing footprint and medical does give us significant opportunities to grow in the medical market.
Got it and then regarding the.
The.
The target.
$6 EPS run rate.
By end of the year.
So.
Many contribute from that lets say for Q.
Yeah.
We may see the sequential growth in top line and also probably you will see some.
Of course margin benefit from them.
Maybe more.
Moderates.
The cost premium from the Sovaldi.
ICT and so my question is what will be a major driver or achieved six dollar plus run rate.
He is.
At fourth quarter, that'd be more driven by topline or <unk>.
Margin or kind of equally on both sides.
Yes, I think earlier in the year.
We felt that the supply chain would be improving and we would see some of these cost premiums abate and we would get some uplift from gross margin by the end of the year, which would contribute to our getting into $6 annualized earnings per share.
I think a couple of points as weak as it become current and that is first of all I think we've done a pretty good job of getting parts because our focus has been on getting product to customers that's come at a higher cost.
But we've been able to get revenue get revenue out and so.
If you look where we are today in Q2.
Nearing the end of that $1 15 per share and.
And gross margins are sort of in the 37% range. So.
I guess, our comments today tried to indicate that as we get parts and are able to ship more we will see the volume that will support that.
Also we'll see some improvements in gross margin.
But I think we are tempering, our view a little bit on gross margin improvement by the end of the year.
Just on how persistent the higher part of the cost is going to be so we believe we can get to a $1 50 without a significant uptick in gross margin and that as that increase in gross margin comes as the supply environment improves that will just be additional tailwind to our financial performance.
Got it and then maybe last one quick.
Can you elaborate.
The new design win in there.
They have inter segment.
Coming out of that.
Sure.
Any color around that.
Geography or product line.
Any color and then.
And how long it could take two.
Camber to kind of.
Following the order.
Is that potentially something next year first half or second half.
Any color would be helpful.
Yes. Thank you for the question, we've been going through a transition in the data center market for the past year and a half so what we've been doing is focusing on a more higher value added designs.
We can either be sole sourced.
Lead source and have to source situations.
That's actually progressing quite nicely I can't give you a lot of color just to Jackie.
Where were playing and who were playing with but I can tell you is that I am pleased with the progress.
At the same time, given the dynamics in the Hyperscale market, which is supply constrained. We're also doing a bit better there because we're able to pass on some of the increased parts cost to the hyperscale customers.
I am seeing.
<unk> seen improvement in the Hyperscale business, both with our current business.
The gross margin performance as well as the future business, we're winning today so.
Happy with it.
Thank you.
Youre welcome our next.
Our next question comes from Patrick Ho with Stifel. Please proceed.
Alright, Thank you very much and congrats on a nice quarter, Steve maybe first off you've obviously shown that the production levels have increased with the last few quarters, you've talked about your Malaysia facility ramped in the past can you give us an update on some of the efficiencies and the optimizations that are recurring there that are allowing more.
Our output to come from it which is obviously, helping your financial results.
Yes.
Great question.
So what we've been doing there for the past nine months is basically growing our output.
We're also expanding our floor space, so thats a three floor factory.
We're going to finish building up the third floor here in the next couple of months.
So what we've seen is a steady increase in output.
Either the Malaysia factory.
The new Chief operating officer in September .
The big impact on our operations there.
We also brought a new plant manager in.
So I think.
One thing that I've noted.
As our attrition rate is.
It's come down to below the average in Malaysia.
And.
A year ago was much higher than average so.
When you have that situation we can have.
Constant pool.
Full of employees you are quality goes up and your output goes up and we've seen that.
Ladies and factory.
Right and maybe as my follow up question I know, Steve you've been in this industry a long time whenever costs go up they don't tend to go down.
Over time, but this is obviously a very different environment. How are you passing along some of the cost increases that could be permanent on your end towards your customers. Because obviously, everyone is trying to figure that aspect out across the ecosystem.
Yes, so we actually had a major price increase that happened last fall.
And.
Those actions are never easy alright, because nobody wants to pay more but the way we approach that as well.
We basically catalog.
The increases that we're seeing across the board not just Ics, but.
Most everything we buy is going up in price.
So we basically laid out to our customers and this is what we're experiencing we need some help absorb these increased costs.
And that's how we that's how we sold it and Thats basically.
And we will continue to play a very transparently with our customers.
We are not adding margin to the increased costs were just saying hey, we need we need to be compensated increase prices, we're paying particular brokers and dealers.
As well as to the manufacturers.
It's a heavy lift there wasn't heavy lift last fall, but I think the team has gotten better at it and if we need to raise prices again this year.
How to do it.
Hey, Patrick Alright, Thanks, Jamie Yeah.
Go ahead is maybe when we think about about cost capacity in the mill customers Theres really two categories.
One of these broker dealer costs, we think are transitory theyre very transactional in most cases oftentimes, we'll talk to our customers before we buy the parts.
Whether they are willing to help support that and.
Those were just passing the costs along to reimburse you guys. So we've had a pretty good track record, we don't recover everything but we've recovered a lot of thats. The premium buys that will go away in our view as transitory more.
Structural increases in price, where we're seeing actually our Oems suppliers raised prices our goal is to largely.
Either recover those two price increases of our own or through efficiencies and other things that we can do overtime. So as we think about inflation as something that's more structural we believe that we will be able.
To cover that over time because it's.
That said, it's an entire ecosystem in order to be able to pass those costs, along or make improvements to offset them.
Alright, Thank you very much guys.
Youre welcome.
Our next question comes from parallel tests Misra with Bamberg. Please proceed.
Thank you.
And your semicon.
Semiconductor business is there a way to think about your exposure to memory versus logic.
Asked to do which of these do you have a higher exposure.
Yes, so apparent to us in general I would say, we have a higher exposure to logic.
So.
The memory ups and downs affect us a little bit less than some others.
If you take a look at.
The total WMC.
Just a few years ago that memory was.
Roughly two thirds of the market today, it's more like 40% and so well it's significant.
The logic market is bigger, but leading edge and even trailing edge and so we're participating all the spaces, but we have more and more of our revenue weighted towards.
Towards the.
The foundry space than we do to the memory space.
Got it Thats useful and then with regard to your operations in China are they now running normally.
<unk> is still impacted by any COVID-19 related lockdowns and are I guess quantify that impact.
In Q2 that that normalized in Q3.
Yes, we were very fortunate that we had no lockdowns in Q2 at our Chinese factories.
Yes sure.
Not that we've had this year was in March we shut down for a week in Shenzhen, but we.
We recovered very quickly.
Q2.
Remarkably no shutdowns.
Great to hear guys. Thank you.
Thank you.
There are no further questions in queue at this time I would like to turn the call back over to Steve Kelley for closing comments.
Thank you much for joining the call today really appreciate your interest.
Just some takeaways I think Q2 was it was a good quarter, we were able to find.
More personally expected in turn those parts into revenue quickly.
We're working hard behind the scenes designing new products and bringing new technologies to market.
And finally, we have great confidence in our ability to deliver superior profitable growth over the long term.
So again, thank you for joining the call today Bye bye.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.