Q4 2022 Advanced Energy Industries Inc Earnings Call
Greetings and welcome to the advanced Energy fourth 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.
Is being recorded it is now my pleasure to introduce your host Edwin Mok.
Vice President of strategic marketing and Investor Relations. Thank you Edwin you may begin.
Thank you operator, good afternoon, everyone welcome to advanced Energy fourth quarter 2022 earnings Conference call with me 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 in bristow conferences in the coming months.
If you have not seen our earnings press release or presentation, you can find them on our website at IR advanced energy Dot com.
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 information concerning these risks can be found in our SEC filings.
All forward looking statements are based on managements estimates as of today February eight 2023, and the company assumes no obligation to update them.
Term targets and long term aspirational goals presented today should not be interpreted as guidance.
On today's call all financial results are presented on a non-GAAP financial basis, unless otherwise specified exclusive on non-GAAP results or stock compensation amortization acquisition related costs facility expansion and related costs restructuring charges and unrealized foreign exchange gain or loss.
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 Edwin.
Good afternoon, everyone and thanks for joining the call.
We delivered strong results in the fourth quarter.
Taking advantage of healthy demand.
Proof component availability.
Solid manufacturing execution.
For the full year.
We achieved record revenue of $1.85 billion and record earnings per share of $6.49.
Thanks to robust demand across all of our markets.
And improved execution across the company.
Sales into each of our markets grew 20% or more in 2022.
Overall our.
Our operational performance improved throughout the year.
Due to better component availability.
Successful qualifications of alternative parts and Redesigns.
And good manufacturing execution.
We doubled the number of new product launches in 2022.
By and large these new products employ leading edge technology.
And our proprietary in nature.
These products led to additional design wins in 2022.
Particularly in the industrial medic.
Moving forward.
We expect design win activity to accelerate 2023.
As customers shift their focus from supply chain issues to product.
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We believe our leading edge power delivery solutions enable our customers new products.
It will fuel our profitable growth.
For years to come.
And 2022 we successfully integrated S L power into advanced energy.
S L expanded our position in the medical power market.
Where we are now one of the top players.
In addition, we are adding capacity.
<unk> capability at the former S O power factory in Mexico.
To accommodate customers, who prefer a north American manufacturing site.
Now I'd like to provide some color on the current supply chain environment.
Scarce components are still getting revenue in the industrial computing telecom and networking markets.
Power Ics and fats.
Are the two most significant constraints.
These trailing edge products.
Our widely used across the electronics industry.
Particularly in automotive.
And industrial applications.
In semiconductor equipment, we are seeing fewer parts shortages.
This has allowed us to reduce lead times for some of our products.
Which in turn has enabled our customers to normalize their order backlog.
Now I'll provide more color for each of our end markets.
In semiconductor fourth quarter revenue increased 30%.
Year on year.
The $232 million.
In line with our expectations.
For the full year.
Advanced energy revenue in this market grew over 31% much.
Much faster than overall W. F E.
In the fourth quarter, we secured new design wins and wafer inspection.
And remote plasma source applications.
We also introduced new technology platforms for advanced etch.
In the industrial and medical markets.
Fourth quarter revenue grew more than 20% year on year.
$219 million.
Despite those record shipments.
Our industrial medical order book still increased in Q4.
In the medical market, we secured several new wins.
In surgical medical laser.
Diagnostic and life science equipment.
In the fourth quarter, we launched our flexi charge the industry's first high voltage capacitor charger and low voltage power supply in a single integrated product.
We designed this product to meet the power needs of medical laser applications.
By combining our industry leading high voltage.
And Configurable power supply technologies.
Initial customer feedback has been enthusiastic.
In the industrial space, we secured design wins in three D printing.
Industrial laser.
In test and measurement applications.
Now moving to our computing.
At working and telecom markets.
Fourth quarter revenue from data center computing customers totaled $95 million.
A new record for the company.
Telecom and networking revenue grew 50% year on year to $44 million.
Our upside in both markets was driven by improved component deliveries late in the quarter Cup.
Coupled with our ability to quickly turn those scare sports into revenue.
Now I'll move to the 2023 demand picture as well as our priorities for the new year.
We expect the 2023 will be a down year in the semiconductor market and our team.
Actions to lower our cost structure too.
To adapt to this new demand environment.
Even though overall semiconductor revenue will be down year on year.
There are pockets of strength.
Including our service business.
Our high voltage ion implant products.
And recent design wins, which are still ramping to volume.
Because of these pockets of strength.
Mmm.
Also we believe the variety of markets, we sell into will have a smoothing effect on the aggregate revenue in or non semiconductor markets.
Now moving to the priorities for 2023.
Our first priority.
Just to maintain our new product and design when momentum.
We want to be the technology leader in every market we serve.
To do that we intend to maintain our investments and R&D.
And push our development teams to move even faster.
The second priority is to improve the efficiency of our manufacturing.
And supply chain operations.
We made a lot of progress in 2022.
And can make even more in 2023.
We will optimize our factory footprint.
And streamlined our network of subcontractors and component suppliers.
We learned a lot about the strengths and weaknesses.
Of our supply base over the last two years.
And intend to concentrate our business.
With the best performing suppliers.
The third priority is to increase our engagement with customers across our markets.
We have a large talented salesman applications team.
And a strong network of distributors and Valuating resellers.
We intend to use this worldwide team to focus on the needs of fast growing small and medium size customers.
While maintaining high service levels.
That are larger customers.
Finally, we will take special care to control.
Discretionary expenses in 2023.
I would like to close with a few parting thoughts.
First.
We just wrapped up one of the best years in advanced energy history.
Delivering record financial performance.
And a record number of new products.
Second we are carrying that momentum into 2023.
We will go full speed ahead with our R&D efforts.
And improve our efficiency across the company.
Finally, we believe that our increased participation in a variety of high value markets.
Coupled with our pockets of strength within the semiconductor market.
Will allow advanced energy to perform substantially better.
And past semiconductor market slowdowns.
Paul will not provide more detailed financial information.
Thank you steed and good afternoon, everyone. We.
We delivered strong financial results in the fourth quarter and a record 2022 as.
As we secured additional supply of scares components.
Gander leverage our backlog in low channel inventory to perform better than the market.
Fourth quarter revenue of $491 million and EPS of $1.70. Both reached the second highest levels ever for the company.
Overall revenue grew 24% year over year and 18% organically.
And the fourth quarter backlog declined to 875 million down from 1.1 billion at the end of the third quarter.
Approximately 40% of the sequential decline came from the China based semiconductor customer orders, which we moved out of our reported backlog, but we're not cancelled.
The rest of the reduction in backlog reflected lower demand.
And changes in ordering patterns from our semiconductor customers as we improved our lead times.
Backlog for non semi markets remain unchanged quarter on quarter, despite robust shipments.
As we further resolve critical part issues, we expect to work down our total backlog over the next several quarters to a more normalised level of $4 million to $500 million.
Now let me go over our financial results in more detail.
Revenue in the semiconductor market was $232 million up 30% year over year, but down 13% from a record Q3.
Roughly half of the decline was a direct result of the China based export control regulations announced in the quarter.
In addition, our customers lowered their bill plans in response to the current environment, which was partially offset by our ability to largely restock customer inventories back towards normalised levels.
Revenue in the industrial medical market was $119 million up 21% year over year and flat with last quarter's record level.
We continue to be parts constrained in this market and believe we have upside as component availability improves.
Data Center computing revenue was up 18% year over year, and 8% sequentially to $95 million, a new quarterly record.
<unk> telecom and networking revenue is $44 million up 15% year over year and 4% sequentially.
Fourth quarter gross margin was 36.6% down 90 basis points from last quarter.
Due primarily to less favorable revenue mix lower volume and continued higher material costs.
Although we began to see some moderation in premiums and recoveries towards the end of the quarter.
We expect higher material costs to continue to Impactite gross margin through the first half of 2023.
With gross margins gradually improving in the second half of the year as premiums abate and historical costs flow through our inventory.
Operating expenses were $101 million up slightly from last quarter, mainly due to timing of programs and infrastructure investments.
Operating margin for the quarter was 16%.
Depreciation for the quarter was $9 million and our adjusted EBITDA was $87 million.
non-GAAP other expense was $1.1 million on better interest earnings partially offset by foreign exchange losses.
Given higher interest earnings on our cash and the benefits to interest expense on our swap meet.
We expect our non-GAAP other expense to be in the 1 million dollar range plus or minus going forward.
During the quarter, we initiated a restructuring plan and recognized $5.6 million and restructuring costs <unk>.
Primarily associated with the integration of S. L consolidation of certain production into our higher volume factories.
And other targeted reductions consistent with lower volumes in 2023.
In addition, we ceased production at our <unk> and factory at the end of Q4 and will fully closed the facility within the current quarter.
Looking forward, we expect another $1 million to $2 million of restructuring in Q1.
As a combination of these actions and attrition, we expect total head count to be down approximately 10% by the end of 20 twenty-three mostly in our factory operations.
Or non-GAAP tax rate was 17%.
By the level of annual earnings geographic mix and troops to your in tax positions.
For 2000 twenty-three, we are modeling our gap and non-GAAP tax rate in the 18th 19% range.
Fourthquarter EPS was $1.70 up from last year's EPS of $1.36 and down from the record third quarter EPS of $2.12.
Now, let me quickly touched on our full year results.
And 20 twenty-two we delivered record revenue of $1.85 billion, which was up 27% year over year.
Excluding the S. L power acquisition organic revenue grew 23%.
We achieved record revenues in the semiconductor industrial and medical and data Center computing markets.
On the other hand, we paid over $100 million of material premiums to secure critical parts.
Although we were able to recover a portion of these premiums from our customers are gross margins were negatively impacted.
Despite the sizable cost.
2022, non-GAAP earnings reached a record $6.49 per share.
And our annualized second half earnings surpassed R. E. P. S aspirational goal of $7.50.
Turning now to the balance sheet.
Total cash and marketable securities at the end of the fourth quarter was $461 million with net cash of 88 million.
Cash flow from continuing operations was $71 million.
Inventory days for 109 and turns improved to 3.3 times up slightly from 3.2 times in Q3, as we began to consume inventories of non critical parts.
DSO ticked up slightly to 55 days.
N D. P O declined to 49 days down from 61 days last quarter.
Largely due to the timing of purchases and lower inventory levels.
As a result networking capital increase to 115 days from 106 days last quarter.
During the fourth quarter, we invested $19 billion in Capex as we began to incur the cash expenditures for many of the infrastructure and capacity investments initiate it earlier in the year.
Looking forward.
We expect Capex to run approximately 4% of sales and timing of project completions and investments to optimize our footprint and scalar structure.
During the quarter. We also made that principal payments of $5 million paid $3.8 million in dividends Andrew.
Andrew repurchased approximately $700000, a common stock at $69.16 per share.
Turning now to our guidance.
Based on the decline in the wafer fab equipment market, we expect our semiconductor revenue to be down in the high teens sequentially with the impact of the market declined partially mitigated by our pockets of strength.
And our ability to complete the restocking of customer inventories to normalize the levels.
While demand is stronger in our other markets revenues continue to be gated pie supply of critical components.
As a result, we expect first quarter revenue to be approximately $450 million plus or minus $20 million.
We expect Q1 gross margins to be in the low 36% range on lower volumes and modest improvement immaterial cost premiums.
We expect Q on operating expenses to be down slightly from Q4, but the increased modestly for the balance of the year on inflationary factors and continued investment in critical R&D and growth initiatives.
As a result, we expect cure non-GAAP earnings per share to be $1.10, plus or minus 25 cents.
Before I opened it up for questions I want to highlight a few important points.
2022 was a record year for advanced energy.
Our semiconductor revenue growth substantially outperformed the wafer fab equipment market.
And each of our end markets grew 20% or more year over year.
While this will inevitably result in tougher comparisons in 2023, we continue to expect to perform better than the market over the course of the year.
More importantly, we believe our diversification into multiple markets larger and more stable service business and healthier backlog in customer inventory positions will enable us to perform substantially better than in previous market cycles, demonstrating the benefits of a longterm strategy.
While the supply chain remains dynamic we expect improvement in deliveries of critical components over the course of the year.
Which coupled with lower material premiums and improved operational efficiency will allow us to gradually improve our gross margins in the second half of the year.
During this time, we will continue to accelerate new products and scale the company, while controlling a discretionary spending and optimizing our footprint.
As a result.
We expect advanced energy is well positioned to outperform during this cycle emerge stronger as markets recover and.
And continue to grow revenue and earnings over time.
With that we'll take your questions operator.
Thank you will now 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 that your line and then the question queue you May press.
Crestar too if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
One moment, please while we poll for questions.
Thank you. Our first question is from Quinton with Needham and company. Please proceed with your question.
Hey, guys. Congratulations on the strong finished 2022, I guess, maybe maybe polar Steve I guess, it's kind of a big picture question.
Sounds like margins are gonna stay.
Fairly flattish in the low 36 per cent range in the first half of the year with only modest improvement expected in the second half of the year I guess, what do you think it takes to get back to the 40 41 per cent gross margins envision by the aspirational model.
Yeah. That's a good question I'll take that one Quinn so clearly in the near term, we continue to be impacted by higher material costs.
And we expect those to begin to abate largely in the second half will still see those through the first half just given the timing of.
These costs rolling through our in our our inventories now we do expect to see them to start to pick up in the you know later in the year, which will give us some improvement certainly as we haven't an exit right 2023.
But the the offset to that is you know we're not anticipating any pickup in volumes from these levels. In fact, our second quarter may even be down a little bit from this quarter.
As we won't get some other restocking shipments we we expect in the first quarter. So based on that where we will see headwinds from volumes, but as as volumes began to recover and as the actions that we are taking over the course of the year to optimize our footprint take hold then we expect that would either be back on that track.
To get back to 40% or greater.
Got it and then I guess.
You kind of hinted at the injured My next question, but just just give us a sense, where you are in terms of the chip in it sounds like you had an opportunity to begin restocking those in the fourth quarter and you expect to restock, perhaps more in the first quarter, but it sounds like.
Am I right to assume that it by the end of the March.
Probably back to normal levels in terms of Japan's or or inventory levels at your semiconductor customers.
Yeah, that's right, we definitely saw some benefit of that in the in the fourth quarter and as I said in my comments, we've been able to largely restock. This now there's a little more to go so we'll get a little more benefit in the first quarter, but we anticipate.
But that will be you know customers will have the inventories they would like on their shelves by the end of the first quarter.
Got it okay. Thank you.
Thank you. Our next question is from Scott Graham with Luke Capital markets. Please proceed with your question.
Hi, I'm here I'm, sorry, [laughter] will <unk>, a Scott same thing uhm congrats on a.
Good finish too.
The year and I have a good evening couple of questions. So you're looking.
Backlog, where it is and you're looking to bring that.
Two I think you said you.
You need to say to four to five four 500 million or <unk> <unk> <unk> <unk> <unk> <unk>, maybe I misunderstood down by $4 million to $500 million could you how does that.
How does that play out I'm, sorry, I just missed that when you said it.
Yeah, no worries, we expect that backlog, we'd like to bring it to about $4 million to $500 million. We think that's a reasonable target level that would actually be probably a little more than historical levels, but just given the nature of the markets are these days, we think that's a more normalised levels and as we said we expect that to happen over the next several.
Quarters, we continue to have you know very healthy backlog as we mentioned are non semiconductor backlog actually increased for for industrial and medical and was about flat for the others. So it's actually.
Continues to be an opportunity for us as we get some of the critical are scares parts in to be able to.
Bring in our lead times bring that backlog into more normalised levels, and and we expect that will happen over the next several quarters.
Thank you and then can you just remind me the.
Or maybe just tell us the 875, having sex with my business.
Yeah, we haven't historically broken that out but as I mentioned the backlog reduction. This time was largely concentrated are entirely concentrated in semiconductor in part because we removed some backlog out of a reported backlog the China orders that was about 40%.
And the rest was really bad rebalancing in our semiconductor markets. You know we were able to fill in some of the the the bends as I mentioned in my earlier question, we've been able to bring our lead times down and of course, our customers have reacted to the lower demand environment and brought their orders down. So if you look outside of semi our backlog was about flat from last call.
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Reflecting really stronger demand across those markets and continues to represent represent an opportunity for us to bring that more in line in either buffer.
Lower demands if that happens in the future or deliver some upside if we can get additional parts. As we go forward that are gold clearly beta to try to bring that backlog and therefore I lead times you know more in line with that four to 500 million dollar target.
I Gotcha L. L last one for me just a quickie.
The gross margin guide for the first quarter low 36 is I'm.
Fries, you didn't mention mix as one of the key components of the Delta.
Weirdest mix swollen that.
Yeah. Thank mixed does have some some impact.
Certainly as we go from from the second from the fourth quarter to the to the first quarter.
But if you if you look at overall sort of a combination of the actions, we're taking a little bit fewer of the P. P. V recoveries, we still expect that higher material costs, but less recoveries.
Those things tend there are kind of attending and the actions like I said, we're taking are kind of upsetting the impact of the lower volumes. Overall, so net net we expect to be down a little bit it's actually we think pretty good.
Delever perspective, the hold margins, you know I'll say down a little bit or you know down to flat.
And it's a function of the actions we're taking in in some improvement immaterial costs offsetting the other items.
You know as we think as we look forward. We think we can probably hold gross margins in trough margins around 36%, I'll say plus or minus depending.
Depending on volume somewhere the market's go but that's that's kind of how we're thinking about it and was Astral as was asked earlier by Quinn you know, particularly in the second half as these material costs subside the impactful impact of the actions, we're taking too.
You know optimize or a factory footprints those should help to see a little margin improvement in the back half of the year, but really position as in 2024 to see either continued margin improvements it sort of these similar lower levels or if we see revenues pick up a little bit be able to kind of accelerate back towards our 40 per cent target.
That's great. Thanks.
Yep.
Thank you. Our next question is from Christmas Bangkok with Cowen and company. Please proceed with your question.
Hi, Thanks for taking my question that a couple of them to Paul just to follow up on your earlier comments you know you mentioned.
Picking up grocery budget should improve and promote these cost reduction and other factors should all set volume declined.
Q as what is your visibility today, because if I try to triangulate your answers it seems to me that the brunt of the revenue decline.
And with the first half of it kind of starts bought a medium Q2 Q3.
<unk> and improve into Q photos of the way to think about linearity of revenues this year.
Yeah, you know we have to you know.
<unk> you know we were operating in this market, where Sammy is down this coming year.
But as we look at overall, we expect semi to be down.
And we expect our other markets to be generally.
About flat or a relatively stable overall.
So from an operating and operating perspective, you know that way. We're planning is you're right. We expect most of the brand to be here in the <unk> in the first quarter, perhaps a little more in the second quarter, particularly as we won't have the benefit of the inventory stocking on the semiconductor side and they kind of bounce around those levels for the balance of the year I think thats Jenna.
Really consistent with how people see the market right now obviously, it's hard to look out that far and know for sure.
But that's that's our operating assumption in the gross margin color I give sort of reflects that type of a of a revenue projections.
Got it got it right I have two other questions. One is obviously laughter you guys you guys do that really well.
Performing W. A fee typically component companies tend to underperform WP during down here. So I'm just kind of curious.
If you think W don't pick a number 20% 25%.
Think about your family revenues I'll, let you two W. At the ends up this year would you be in line was better than that I'm gonna have a quick follow up.
Yeah, a crucial jump in here.
Think it was the first thing we should talk about is the fact that you know is 50% non semi as well as 50% somebody could put to revenue.
As we said before we think the the.
The non stomach after revenue, we could hold that flattish urine year. So that's quite a cushion for us compared to past.
Semiconductor downturns.
And within semiconductor, we think we do have pockets of strength or service business is much larger and stronger than it's been in past downturns.
We've got a very good position and iron implant.
And as you know, there's still a lot of demand for iron Implanters up there. There's people tried to address the the pro Roissy shortage.
And then we've got a number of new product ramps that are happening you know across the application set in semiconductors, which served to offset to a certain extent you know some of the the downdraft in semiconductor.
Got it got it thanks to you for that and then just a follow up on the backlog.
I can call you mentioned normalized backlog a 400 <unk>.
Is it fair to assume you probably get to this level until a couple of quarters of revenue decline and.
At that level is it roughly.
50 50 <unk>.
You know I don't know how long it takes it kind of depends on the demand environment, but you know we've already seen sort of I'll say, a pretty good reset of the semi backlog. This quarter, we took out the China demand and and we've normal we've adjusted that basically to our customers outlook at this point.
So is the balance if you think about where the most of the rest of the backlog as in our industrial and medical areas, which I said. Despite you know kind of you know again near record shipments that Ayn M backlog was up again this quarter. So it depends of a bit of a function on it the demand.
You know how well the demand for these other markets continues we think that looks relatively stable all things considered and and then our ability to solve critical parts and actually eat into that backlog and bring our lead times down so that's.
That's that's a little bit how we think of it my my sense is it will take a few quarters to roll that doubt I doubt that that's gonna get to our target range and a quarter or two.
Alright, Thanks, a lot for Thanksgiving.
Mhm.
Thank you next question is from a turf Molly with city. Please proceed with your question.
Hi, Thanks for taking my questions in a nice execution first see if you can talk about what you're seeing on the data center market.
And maybe if you have color enterprises versus cloud you know we have been hearing about moderation in that market.
Comment in backlog indicate that you are you seeing a stability in that market. So what are you seeing in the data center market.
Yeah. It's interesting, we obviously have strunk participation in that market.
I could say that we have not see major changes in demand in fact.
We're still supply constrained in that market.
So what we're seeing is continual from the customers.
But we're also seeing that transition happening.
And it's moving in her favorite basically.
We see the move to 40 volts, it's starting to accelerate.
We are the leader there we were the first and we sold the best technology for 48 volt.
Type of Hyperscale applications.
We see a strong move to higher efficiency.
As well as the cost of electricity go up in the environmental concerns become more permanent you don't want a good position because we have the most efficient solutions.
And finally, we see a strong moved to artificial intelligence.
Which increases G P U and memory intensity and it really places a premium on power density.
But also an area, where we excel so I think you.
You know over the medium to long term, we're well positioned to.
To gain share because these technology managers, we have in the short term, we cede man still being pretty strong, but gated by component availability.
Great.
And a follow up for Paul if you can.
Touch on restructuring and uhm are there opportunities for fixed asset optimization. As you guys are heading to downtown and eventually come out are there any areas, where you can <unk>.
Some products are businesses to lift up too gross margin. Thank you.
Sure. So we announced a plan for restructuring this is largely around optimizing our footprint and if you targeted reductions around the company.
We do think that our goal as part of this isn't just to try to match head count to some some level production or output, but is actually to improve our footprint. So we want to move my products from some of our smaller factories and leverage those around her larger factories.
There's areas, where we're going to make some investments as Steve mentioned will expand our.
Newly acquired footprint in Mexico, because we think that's an attractive place and gives us some strategic benefit in North America and are larger factories will continue to optimize those around efficiency and capability. So we would expect to come out of this with you know I'll say, maybe a little bit smaller footprint certainly from it.
Count perspective, but a more efficient one in Italy to scale better as we move into the next upturn.
Just to address your question about exiting businesses, where we have no intention of exiting any business.
And you know we had some concerns about the computing.
Networking businesses, a coupla years ago, and I could say, we've done a really good job.
Improving the bottom line performance there.
So much less concerned than it was two years ago.
We've also done a good job refocus your inner resources on proprietary opportunities within those market spaces, and so between a better job managing our pricing tactically in a better job focusing on higher volume of opportunities I think that business is looking much better.
Thanks to you.
You're welcome.
Thank you. Our next question is from Steve Barger with Keybanc capital markets. Please proceed with your question.
Thanks for.
For the expected acceleration of new product wins and design wins. This year do you expect more traction from modified standards or full custom solutions and can you talk about how those compare just from time to market and margin perspective.
Yeah, Steve.
Think it's a combination of both quite frankly, the important thing is to introduce and a lot more new platforms, that's across semiconductor industrial or medical.
As well as in in the high volume areas like data Center.
And what happens with his new platforms. It goes one of two ways the.
The customer will say hey, this this meets our needs, but I need a few changes and that's a modified standard or.
Or the customer will say, you know you're pretty close but I need some significant changes you know and Ah leverage what you have but I need. This other feature as well that's more of a custom product.
But either way, we're we're happy with it because at the end of the day ends up being a sole source product.
And a source of revenue for many years to come.
Is there a big difference in in dollars and margin between the two.
Not not really so the full custom products tend to go to a large customer so they're higher volume typically so they require more engineering investment upfront.
But then the volumes in the dollars would be higher with those types of products.
Notified standards tend to be more towards smaller medium size customers the engineering effort as much less.
But but but the gross margin percentage for both of those products and similar.
Got it and.
You said, there's a strong network of distributors and value added resellers are you fully covered in those channels, especially in the the newer markets medical and industrial in terms of geographies and can you talk about the mix impact of having more product go through those channels versus direct sales.
Yeah, if I look at our position relative to our competitors.
We have more of a worldwide footprint than most so we have strong organizations in Asia, Europe and North America.
That said, there's a lot of improvements we could make it.
And we're doing that so we've held sales conferences in the past year and all regions.
And really tried to align our internal sales teams with or external partners.
Make a much.
More concerted effort trained to penetrate industrial medical customers. So I I have high hopes that we could do a lot better this year than a 2024.
Understood. Thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from <unk> with Raymond James. Please proceed with your question.
Thanks for taking the question.
Given the macro headwinds unmet demand side that you.
You've.
Outlined today.
I'm curious.
The M&A landscape in terms of.
Had a perspective.
Target rich environment is.
Perhaps offering better opportunities now than it was in happier times 12, or 18 months ago.
Yeah, I'll take that one prevail.
You know, we we think the environment today for strategic buyers is better than it was last year or in 2021, So that's a positive.
You know I I think <unk>.
Many of.
The companies operate in our space.
Have been handicapped from the past two years due to the the the park shortages and.
So I think some of those shortages are starting to go away and.
I think they're.
Probably going to realize this is about as good as you're going to get right. So there is some demand challenges but.
The financial performance they come up with in 2022.
Will lead to.
I think more reasonable valuations as we engage with those targets.
So yeah. The bottom line answer to your question is I think it's a more favourable environment and.
You know, we'll we'll take advantage of that.
And from a balance sheet perspective, I think the last two quarters you had.
<unk> sure.
Share buyback and not not much M&A recently, so you'll be pretty soon and.
Sizable.
Net cash position what are your thoughts on.
At.
Open that's too <unk>.
Labour off the balance sheet, if needed for the right opportunity.
Yeah, you're right <unk>, we have a we have a good balance sheet, we have net cash again.
After a brief time when we were about cashed in debt equal and we should generate cash during the downturn here.
And we're fortunate that we have a very good credit agreement in place that's relatively low cost that we can extend either through a line of credit or through some accordion.
Features that are within it. So I think we have capacity if we saw the right opportunity.
To be able to use both our balance sheet and our and our credit position to you know to.
Make that acquisition at the same time, you know, we're gonna balance to make sure that it's the right return money cost more of these days and also ensure that we don't overlap with the company. So we in general you don't have a target of not going beyond three times a leverage ratio.
And so you would you would manage all those things to make sure that you know we add value to any any M&A that'd be dead.
And then.
Lastly, a quick point of clarification with the shutdown of Ah Shan Shan Wa.
What is the manufacturing footprint of the company right now.
Yes.
333 main areas, where we have large factories, we still have one in China.
Now have a large and very good factory in Malaysia, and we have footprint in the Philippines. We also have you know a handful of we call them kind of boutique factories in different places aligned with with local engineering teams for some of the acquisitions we've done over time.
Okay.
Clear thank you guys.
Mhm.
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