Q4 2023 Advanced Energy Industries Inc Earnings Call
Operator: Greetings. Welcome to Advanced Energy's fourth quarter 2023 earnings call. Until next time, all participants are in listen-only mode. The 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.
Greetings welcome to advanced Energy's fourth quarter 2023 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad. Please.
Operator: Please note, this conference is being recorded. At this time, I'll turn the conference over to Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Mark, you may now begin. Thank you, operator. For more information, visit www.fema.gov and find out. Let me remind you that today's call contains forward-looking statements. 2012 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services Office of Communications and Creative Services, and a notch
Please note this conference is being recorded.
At this time I'll turn the conference over to Edwin Mok, Vice President of strategic marketing and Investor Relations.
Edwin Mok: You may now begin.
Okay.
Edwin Mok: Thank you operator, good afternoon, everyone welcome to advanced Energy fourth quarter 2023 earnings Conference call.
Edwin Mok: With me today are Steve Kelley, our president and CEO and Paul Oldham, Our executive Vice President and CFO.
Speaker Change: You can find out earnings press release and presentation on our website at IR thought at that 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 performance.
Edwin Mok: Information concerning these risks can be found at www.nasa.gov, all four looking statements, and many targets beyond the current. On today's call, our financial results are presented on... Proof of our non-GET results, Stockholm, and, and realized for detail reconciliation between, With that, let me pass the call to our new, In this, I'm making... We also have... and many more, we're working on www.larryweaver.com Manufacture, and so forth, provides, and continues to grow our... during the, doing a better job for our customers by on to our data. Demand, Service, and. We will continue to broaden, and you and beyond, focused on, will now provide. Thank you for tuning in to Fox 11 News. We will hear from Market Sensors when you turn the channel over to revenue, www. EnergyEnergyNation.com Plymouth, mark.michael.com, and Data Center Computing, a business in this market. Parsons Telecom and Network took, and on during the fourth quarter. 2012 University of Georgia College of Agricultural and Environmental Sciences, All rights reserved.
Speaker Change: Information concerning these risks can be found in our SEC filings.
Speaker Change: All forward looking statements are based on managements estimates as of today February six 2024, and the company assumes no obligations to update them.
Speaker Change: Any targets beyond the current quarter I presented today should not be interpreted as guidance.
Speaker Change: On today's call all financial results are presented on a non-GAAP financial basis, unless otherwise specified.
Speaker Change: Excluding from our non-GAAP results, all stock compensation amortization acquisition related costs.
Speaker Change: So your expansion and related costs restructuring and impairment charges unrealized foreign exchange gains or losses, and one time tax benefit.
Speaker Change: Detailed reconciliations between GAAP and non-GAAP measures can be found in today's press release.
Speaker Change: That let me pass the call to our President and CEO, Steve Kelley.
Steve Kelley: Thanks, everyone and to those on the line.
Steve Kelley: Thanks for joining the call.
Steve Kelley: Fourth quarter revenue of 405 billion met our guidance.
Steve Kelley: While earnings per share of $1 24 surpassed our guidance.
Steve Kelley: We delivered record cash flow of $85 million in the fourth quarter.
Steve Kelley: Over the full year.
Steve Kelley: We delivered record cash flow of $213 million by maintaining good profitability and reducing inventory.
Steve Kelley: For the full year, we benefited from diversified end market exposure.
Steve Kelley: Even though where semiconductor revenue was down about 20% in 2023.
Steve Kelley: Revenue in our other markets stayed flat.
Steve Kelley: In total.
Steve Kelley: Our revenue declined roughly 10% in 2023.
Edwin Mok: The gain resulted from the release of will also result. 2012 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Communications, Before I move on, Briefly Review, Revenue, and Aggregate. Rev. Produced by the U.S. Department of Agriculture and the U.S. Department of Agriculture, email to first revenues, and Revenue. Data Center Computing, and A.I. Q1 Gross Margin to be approx. on R&D, and Hap, and John Ackerman. And I'm going to be back in a little bit.
Steve Kelley: A significant improvement over our performance in previous semiconductor downturns.
Steve Kelley: In the semiconductor market, we enjoyed record sales of high voltage products in 2023.
Steve Kelley: We also achieved record revenue in our service business.
Steve Kelley: Due to a growing installed base of subsystems.
Steve Kelley: And a broader portfolio of services.
Steve Kelley: In our other markets.
Steve Kelley: We achieved record yearly revenue and the industrial medical space.
Steve Kelley: Successfully ramped the major hyperscale product to high volume.
Across the company, we launched 20 new platform products in 2023.
Steve Kelley: Many of these platforms are viewed by our customers as game changers.
Steve Kelley: In semiconductor.
Steve Kelley: We launched Everest and egos.
Steve Kelley: For etch and deposition applications.
Steve Kelley: In the industrial medical space.
We recently launched Neo power.
Steve Kelley: Our new flagship Configurable power platform.
Steve Kelley: We're working closely with our customers to adapt and customize our platform products to.
Operator: I'm going to be back in a little bit, increased PAGE PAGE PAGE, and Long-Term Investments. Clear. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue.
Steve Kelley: To meet the specific requirements of high value applications.
Steve Kelley: We achieved a record number of design wins in the semiconductor.
Steve Kelley: Industrial and medical markets in 2023.
Steve Kelley: Exciting new products.
Steve Kelley: And motivated sales team.
Steve Kelley: And enhanced go to market strategies enabled these wins.
Which are a critical leading indicator of future growth.
Steve Kelley: On the manufacturing front, we took advantage of softer loading to accelerate our factory optimization plan.
Operator: If you are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we call for questions, and that's star number one. Thank you, and our first question will be from the line of Joe Kozieracz with Wells Fargo. Please proceed with your question. Yeah, thanks for taking the questions. Maybe first on the SEMI side, I'm just wondering if you could maybe help us out and understand. I think last quarter, you were talking about your customers planning for a flat 2024. Is that still kind of the thought process there?
Steve Kelley: We are executing a multiyear plan to consolidate all of our manufacturing.
Steve Kelley: Into large factories in southeast Asia and.
Steve Kelley: In Mexico.
Steve Kelley: Ultimately, we expect this consolidation to improve our manufacturing efficiency and execution.
Steve Kelley: And it's a key part of our effort to move gross margins above 40% in 2020 five.
Steve Kelley: As markets recover.
Steve Kelley: In the fourth quarter, we completed the closure of two small factories.
Steve Kelley: These closures were in addition to the Shenzhen factory, we closed earlier in the year.
Steve Kelley: Now I'll provide some color on each of our end markets.
Steve Kelley: Fourth quarter semiconductor revenue increased 3% sequentially.
Steve: And then just secondly, on the SEMI business, can you remind us just how to think about the mix exposure between FoundryLogic and Memory? And, you know, are you able to, you think, at least match the market growth rate, just given the kind of your mix relative to the market growth expectations this year? Yeah, Joe, this is Steve.
Steve Kelley: $191 million.
Steve Kelley: A bit better than expected.
Steve Kelley: In the fourth quarter shipments of Everest and Ebola.
Steve Kelley: Units decreased sharply.
Steve Kelley: And we are maintaining that strong pace in the current quarter.
Steve Kelley: Customers are eager to evaluate these new technologies, which offer significant yield.
Steve: Thanks for the questions. With regard to your first question, our customers are still telling us that they think that 2024 is roughly the same as 2023. The other thing they're telling us is that the second half was better than the first half. So essentially, what we're looking at in a semiconductor is a Q1 low point and a gradual recovery over the course of the year. We are very well positioned for the no transitions that are going to transpire starting the second half of this year. So we're very confident in our ability to grow that business in the second half of 24 and into 25. As far as our exposure to foundry logic and memory, you know, we don't have precise numbers on that. But we feel we're a little bit more exposed to foundry logic. But I think as we look at future memory processes, we're also well positioned there. So I think over time, we should benefit from both the node transitions in memory as well as the ones in Foundry logic. Thanks for that!
Steve Kelley: And throughput advantages for advanced process nodes.
Steve Kelley: Also in the fourth quarter, we delivered an upgraded higher flow version of our Mac stream remote plasma source product.
Steve Kelley: In the industrial medical market.
Steve Kelley: Fourth quarter revenue decreased 6% sequentially to $109 million.
Steve Kelley: Production ramps of new design wins, partially offset macro headwinds.
Steve Kelley: We continue to grow our industrial design win pipeline in the fourth quarter.
Steve Kelley: Securing wins in robotics.
Steve Kelley: Test and measurement.
Steve Kelley: 1000 Aero.
Steve Kelley: And in indoor farming applications.
In the medical market.
Steve Kelley: We won multiple designs and surgical and diagnostic applications.
Steve Kelley: During the quarter, we launched our next generation D O power family of Configurable power supplies.
Steve Kelley: Addressing the need for higher power in a smaller form factor.
Steve Kelley: D O power offers best in class power density towards industrial and medical customers.
Steve Kelley: Investments in the channel.
Steve Kelley: And our digital platform.
Steve Kelley: Are helping to broaden our customer base and.
Steve Kelley: And are expected to drive future market share gains in the industrial medical space.
Steve Kelley: We are doing a better job communicating our value proposition to customers across all of our markets.
Steve: And then just on the industrial medical side, can you help us understand, you know, the change in demand or, you know, what is incrementally weaker than last quarter? I think last quarter, you highlighted a couple of different sub markets, but maybe just some help in terms of, you know, where you're seeing the incremental weakness from, just because there's such a diverse business or market for you. Yeah, the industrial medical market is an interesting one for us. You know, we have put a lot of resources there and a lot of emphasis on it over the past two years. And what happened was that in 2023, we set all kinds of records.
Steve Kelley: When customers buying from AE they.
Steve Kelley: They get access to leadership technology.
Steve Kelley: Quick turn customization capabilities.
Steve Kelley: Our world class manufacturing footprint.
Steve Kelley: And long term service and support.
Steve Kelley: Moving onto our datacenter computing and telecom and networking markets.
Steve Kelley: Fourth quarter revenue from data center computing customers totaled $63 million.
Steve Kelley: Down 8% sequentially.
Steve Kelley: Softness in the enterprise market was partially offset.
Steve Kelley: But the volume ramp of our sole source hyperscale product.
Steve Kelley: Telecom and networking revenue was $42 million.
Steve Kelley: Up slightly from last quarter on strong yearend telecom shipments.
Speaker Change: Looking forward.
Speaker Change: We see broad based market weakness in the first half of 'twenty 'twenty four.
Speaker Change: Followed by second half improvement.
Speaker Change: And further strengthening in 2025.
Speaker Change: Softening demand in the trailing edge part of the semiconductor market.
Speaker Change: Sluggish demand in the industrial medical market.
Steve: We set a record revenue performance in I&M, and we also saw that our design wind funnel increased by just under 50%. So we're very well positioned going into this year. I think when I take a look at that market, you're right; it has thousands of customers, hundreds of sub-applications in the industrial medical market. It was actually the last market where supply caught up with demand. That happened largely in the second half of last year for Advanced Energy and is still going on, you know, at some of our competitors. And so what our customers are dealing with is some inventory rebalancing, and they're also dealing with compressed lead times. You know, lead times not too long ago in this business were 26 to 50 weeks, and now they're about 8 to 12 weeks. So that creates a bit of an air pocket.
Speaker Change: And ongoing weakness in the enterprise computing market.
Speaker Change: Are all contributing to a sequentially lower first quarter.
Speaker Change: Despite these short term market headwinds our strategic focus remains unchanged.
Speaker Change: We will continue to invest in proprietary products and technology.
Speaker Change: And we will accelerate improvements in our operational efficiency.
Speaker Change: Our focus areas for 'twenty 'twenty four include first.
Speaker Change: Maintaining the momentum we built the new product launches.
Speaker Change: And design wins.
Speaker Change: New products and technologies are at the heart of our plan to grow revenue and share in the coming years.
Speaker Change: Second.
Speaker Change: We will continue to broaden our customer base and expand our presence at existing customers.
Speaker Change: Our new website is the centerpiece of this effort.
Speaker Change: Since the site went live six months ago.
Speaker Change: Our web traffic and engagement levels.
Speaker Change: Have more than doubled.
Speaker Change: Later this quarter, we will add ecommerce to the website.
Speaker Change: Making it even easier for customers to quickly evaluate our products.
Speaker Change: Third.
Speaker Change: We will continue to improve our operational efficiency.
Speaker Change: And optimize our factory footprint.
Speaker Change: In addition, we will continue to control costs.
Speaker Change: As we did in 2023.
Speaker Change: Finally.
Speaker Change: We have a strong balance sheet and we'll continue to look for inorganic growth opportunities that make strategic and financial sense.
Steve: What we think is that the air park up will last for the first six months of 2024 as the customers do their inventory rebalancing and adjusting to new lead times. We think it returns to normal in the second half of this year. And, you know, that's what we have in our plan. Thank you.
Speaker Change: Looking beyond 2024.
Speaker Change: I remain very confident in our plan to accelerate revenue and earnings growth as markets recover.
We are focused on high value markets.
Speaker Change: With a great team of innovative scientists and engineers.
Speaker Change: Supported by a highly focused sales marketing and operations teams.
Speaker Change: Paul will now provide more detailed financial information.
Paul R. Oldham: Thank you, Steve and good afternoon, everyone.
Paul R. Oldham: In the fourth quarter, we delivered revenue of $405 million at the midpoint of our guidance in a tightening environment.
Operator: Our next question is from the line of Krish Sankar with TD Cowen. Hi, thanks for taking my question. I have two of them.
Paul R. Oldham: Good execution throughout the organization resulted in Q4 earnings of $1 24 per share at the higher end of our guidance range.
Paul R. Oldham: In addition, we delivered record operating cash flow of $85 million and exited 20 twenty-three with cash in excess of $1 billion.
Krish Sankar: First one, Steve, on the last point you made in terms of your customers on the semi-side, you know, doing inventory rebalancing, shorter lead time. Do you think that your customers' revenue has to recover first before you see your semi-revenues recover? Or do you think it could be in tandem, or do you think you could lead their recovery?
Paul R. Oldham: As we projected our backlog returned to a normalized level of $407 million.
Paul R. Oldham: Given shorter lead times and the transition of many of our customers back to utilizing hub or jet Ben's rather than direct orders, we expect our backlog to remain around one quarter of revenue going forward.
Speaker Change: Now let me go over our financial results in more detail.
Speaker Change: Revenue in the semiconductor market was $191 million up 3% sequentially.
Steve: Yeah, Chris, just to clarify my comments on the inventory rebalancing and the short lead times. Those apply to the industrial medical market. So I was answering Joe's second set of questions, essentially. Okay. What do you think of it on the self-signing side?
Speaker Change: Product revenue increased quarter over quarter to meet end of your customer requirements, partially offset by lower service revenue on low fab utilization.
Sales into the industrial and medical market were $109 million down 6% sequentially.
Speaker Change: As we began to see in Q3, increasing macroeconomic weakness impacted overall demand in Q4, partially offset by revenue from design wins, we secured in prior quarters.
Speaker Change: Data Center computing revenue was $63 million down 8% sequentially.
Speaker Change: Our business in this market can be lumpy and we continued to benefit from the ramp of the large hyperscale win we reported in Q3.
Steve: On the semi-side, you know, I think all of our customers are saying pretty much the same thing, right, where they've seen some drop in trailing edge demand, still relatively strong in China but starting to taper a little bit outside of China. And, you know, from a memory standpoint, there's an expectation that they'll see some recovery in DRAM around mid-year and NAND towards the end of this year. And in leading-edge logic, I think there's, you know, a lot of excitement right now about some new transitions that are on the way. So I think with a little pickup in smartphone demand, continued demand for AI, in other computing areas, leading-edge logic should pick up as well in the second half. Got it, got it.
Speaker Change: Partially offsetting further weakness in the enterprise server market.
Speaker Change: Telecom and networking revenue was $42 million up 2% sequentially due to end of your shipments to our telecom customers.
Speaker Change: Fourth quarter gross margin was 35, 7%.
Speaker Change: Down 40 basis points sequentially, mainly on less favorable revenue mix.
Speaker Change: Premiums paid for critical materials approached normalized levels exiting the quarter.
Speaker Change: Based on the timing of costs flowing through inventory, we continue to expect to see the full benefit to gross margin in the next quarter or so.
Speaker Change: Operating expenses were $95 million down two 5% from last quarter and below our plan.
Speaker Change: Actions, we took enabled us to reduce spending while continuing to invest in critical programs.
Speaker Change: This marks the fourth consecutive quarter that we reduced operating expenses in an inflationary environment.
Speaker Change: Operating margin for the quarter was 12, 3% down slightly from last quarter on lower revenue.
Speaker Change: Depreciation for the quarter was $10 million and our adjusted EBITDA was $59 million.
non-GAAP other income was $5 $2 million on higher interest income.
Speaker Change: For Q1, we expect our non-GAAP other income to be approximately $4 million to $5 million.
Paul R. Oldham: And then a follow-up for Paul. Paul, I think you mentioned the March quarter gross margin should be about 35%. I'm just curious, hypothetically speaking, if your June quarter revenue volume and product mix was similar to March at $350 million, and now that you have the benefit of the premium pricing going away and some of the factory closures, what would gross margins be in June if the revenue and product mix were similar to March?
Speaker Change: During the fourth quarter, we recognized $18.1 million in restructuring expenses and impairment charges.
Speaker Change: This charge reflects actions we are taking over the next several quarters to optimize our factories and ongoing adjustments to our operating cost structure.
Speaker Change: We believe these actions form the foundation of aligning our infrastructure to achieve our 40% gross margin target.
Speaker Change: On a GAAP basis this quarter, we recorded a tax benefit of $21.7 million.
Speaker Change: Largely due to a gain of $25.6 million.
Speaker Change: The gain resulted from the release of evaluation allowance based on tax strategies, we implemented to fully utilized previously trapped Nols.
Speaker Change: This will also result in a net cash benefit over time.
Paul R. Oldham: Yeah, I think if you held everything else equal, we ought to see modest improvement from the March quarter to the June quarter. I think as you move further into the year, though, we start to see improvement from the continued factory transitions and other things that we're working on. I think the important point here is we continue to feel that, you know, as revenues move back up and get, you know, roughly, say, flat to the Q4 levels of around $400 million, we feel pretty confident towards the end of the year that that should yield gross margins that are 250 to 300 basis points higher than we had in Q1. And that's the combination of the last bit of materials rolling out, factory improvements in efficiency coming in, you know, volume recovery And so, as revenues just get back to where we were, we think that's a meaningful improvement in gross margins. Thank you.
Speaker Change: On a non-GAAP basis.
Speaker Change: Tax rate for the quarter was 14, 7%.
Speaker Change: Our 'twenty 'twenty four we expect our GAAP and non-GAAP tax rates to be approximately 16%.
Speaker Change: As a result fourth quarter non-GAAP EPS was $1 24.
Speaker Change: Turning now to the balance sheet.
Speaker Change: Total cash increased by $59 million to over $1 billion with net cash of $129 million.
Speaker Change: In the fourth quarter, we delivered record cash flow from continuing operations of $85 million.
Speaker Change: Mainly due to lower inventory of noncritical parts, partially offset by investments in strategic inventories of long lead time critical components.
And total inventory came down $28 million or nine days to 116 days and inventory turns improved to just over three times.
Speaker Change: DSO increased to 63 days from 59 days largely due to timing of revenue and D. P. O increased a day to 49 days.
Speaker Change: As a result, net working capital decreased sequentially from 136 to 130 days.
Speaker Change: During the quarter, we invested $14 million in Capex and made debt principal payments of $5 million.
Speaker Change: And paid $3.8 million in dividends.
Speaker Change: Before I move onto guidance, let me briefly review our full year results.
Speaker Change: And 2023 we delivered revenue of $1.66 billion down 10% year over year.
Speaker Change: Semiconductor revenue declined 20% on the market cycle, but we outperformed many of our semi subsystem peers due to the diversity of our portfolio.
Speaker Change: Non semiconductor revenue in aggregate was flat year over year with record revenues in the industrial medical and telecom and networking markets offsetting market headwinds in data Center computing.
Speaker Change: During the year, we saw improvement in material costs.
Speaker Change: And we accelerated actions to optimize our manufacturing footprint and improve efficiency.
Speaker Change: As a result, despite lower volume our 2023 non-GAAP gross margin only declined by 90 basis points year over year to 36, 1%.
Speaker Change: In addition, we reduced our operating expense base with our year end exit rate down 6% from Q4 2022 in a highly inflationary environment.
Paul R. Oldham: Now, as you look into next year, because of the things that we'll be doing, we've done already with the factory closures, and we'll be doing with, you know, other factory efficiencies this year, we think that we can get gross margins to around 40% on revenues in the mid $400 million range. And that's better than what we've been modeling up to now, where we thought we'd take, need to get to the mid to high $400 million range. So we think there is a lot of upside in the company for gross margins. Obviously, the biggest factor impacting us now is just the revenue levels.
Speaker Change: Overall 2023, non-GAAP earnings were $4.88 per share and adjusted EBITDA was $245 million.
Speaker Change: For the full year.
Speaker Change: Cash flow from continuing operations was a record $213 million.
Speaker Change: We invested $61 million or $3 seven <unk> of revenue in Capex.
Speaker Change: And we expect Capex to continue to run at approximately 4% of sales as we execute our plan to optimize our footprint and scale the company in preparation for growth in 2025.
Speaker Change: Turning now to our guidance.
Speaker Change: While our first quarter outlook reflects further market weakness, we are seeing some early signs, suggesting market conditions will improve as the year progresses.
Speaker Change: In semiconductor we expect revenues in Q1 to be down high single digits on slower trailing edge demand.
Speaker Change: With revenues improving in the second half driven by investment in leading edge logic and incremental memory spending.
Speaker Change: We expect industrial and medical revenues in the first quarter to decline mid teens sequentially.
Paul R. Oldham: In fact, the things we've done, we think are actually protecting gross margins at 35%, which is only down 70 basis points on the drop in volume we've seen. So we think this sort of forms the foundation for, you know, a gross margin acceleration as revenues recover from this point. Thanks a lot, Paul.
Speaker Change: As customers and distributors are very cautious in the near term.
Speaker Change: However, we expect improved market conditions and revenues from new opportunities to drive sequential growth later in the year.
Speaker Change: We expect data center computing revenues to be down mid 20% sequentially.
Speaker Change: As digestion of large programs, we react in the second half of 'twenty twenty-three and ongoing weakness in the enterprise market impact revenues in the first half.
Speaker Change: However, we expect new wins and investments in AI applications to support some market recovery towards the second half of the year.
Speaker Change: Lastly, we continue to expect our telecom and networking revenue to normalize to roughly $30 million a quarter within the next quarter or two.
Operator: Our next question is from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your question. Thanks.
Speaker Change: As a result of these dynamics, we expect first quarter revenue to be approximately $350 million.
Speaker Change: Lesser minus $15 million.
We expect Q1 gross margin to be approximately 35%.
Steve: Steve, most industrial companies we cover are saying what you just did, which is a weak first half, and a return to normal in the back half. But can you talk more about why you think that, just where that confidence comes from? And do you expect I&M to show positive growth for the year in 2025? Yeah, so, basically, Steve, I think I&M is always going to be inherently more difficult given the number of customers we're dealing with and the number of different submarkets. And so we look at a couple of things. You know, one key indicator for us is distribution. So we sell about 45% of our I&M products through distributors. And, you know, we took a look at the data, and, you know, a few things kind of stand out. One is the resale.
Speaker Change: Mainly due to lower volume.
Speaker Change: Partially offset by better mix and actions, we are taking to improve our gross margin.
Speaker Change: We expect operating expenses to be flat to up slightly from Q4 levels with spending on R&D and other critical programs, partially offset by other reductions.
As a result, we expect Q1 non-GAAP earnings per share to be 70, plus or minus 20 cents.
Speaker Change: Looking forward, we expect second half revenues to be higher than first half and our Q4 exit rate to return to over $400 million per quarter.
Speaker Change: Based on the actions, we are taking to accelerate optimization of our factory footprint improve manufacturing efficiency and increase our mix of sole sourced products. We expect gross margins to exit the year 250 to 300 basis points higher than our Q1 guidance.
Speaker Change: We believe this puts us on track to achieve our gross margin goal of greater than 40% at revenue levels in the mid $400 million range per quarter.
Speaker Change: Better than our previous model.
Speaker Change: Before I open it up for questions I want to summarize some key takeaways.
Speaker Change: 2023 provided a solid proof point of our diversification strategy. Despite two of our markets going through cyclical downturns, we reported record revenues in our other two markets and in several product lines.
Steve: So resales at our top five distributors around the world have grown every quarter since Q2 of 22. So we basically exited 23 at a very high resale rate. It also shows that we have gained power share and power subsystem share at all of our major distributors over the past year. And in our top three distributors, AE is now number one in the category of power subsystems.
Speaker Change: I long term investments for new products to channel strategy are yielding tangible results and.
And our focus in the industrial and medical market has driven strong design wins and revenue growth in the market.
Speaker Change: On the financial side, while we're not satisfied with our gross margin results in this challenging environment, we have a clear plan to increase gross margins and to drive earnings growth.
Speaker Change: In the meantime, we were successful in controlling our costs and delivering record operating cash flow.
Speaker Change: Finally, our strong balance sheet gives us flexibility to pursue strategic acquisitions, while maintaining multiple options to create shareholder value.
Speaker Change: Looking forward, we expect demand to increase in the second half of this year and further strengthen into 2025.
Steve: So I think, you know, those are all positive indicators that show we have some momentum in this market and that, you know, our design wins are having some impact on our revenue already. I think the second thing that gives me confidence is that, if you take a look at the industrial medical market, we were still chasing parts through the first half of last year, so there's still a fair amount of delinquencies. We closed out those delinquencies in the second half of last year.
Speaker Change: We are improving our operational efficiency and anticipate gross margins to increase on historical revenue levels positioning us to reach our gross margin goal of over 40%.
Speaker Change: And to deliver higher earnings than our prior peak as markets recover in 2020 five.
Speaker Change: With that we'll take your questions operator.
Speaker Change: Thank you.
Speaker Change: At this time, we'll be conducting a question and answer session.
Speaker Change: To ask a question at this time, please press star one from your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two if he would like to withdraw your question from the queue.
Speaker Change: For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Steve: And so what's happening is the customers have different levels of inventory, you know, because there are a lot of different parts in the systems that they build. And so they're working through the inventory and doing their inventory rebalancing. The other big change our customers are dealing with is lead time. And again, the lead times have contracted significantly. And that creates a bit of an air pocket.
Speaker Change: One moment. Please so we poll for questions once again Thats star one thank you.
Speaker Change: Thank you and our first question will be from the line of Joe <unk> with Wells Fargo. Please proceed with your questions.
Joe: Yes, thanks for taking the questions.
Joe: Maybe first on the semi side I'm just wondering if you could maybe help us out and understand I think last quarter you were talking about your customers planning for flat 'twenty 'twenty four is that still kind of the thought process. There and then just secondly on the semi business can you remind us just how to think about the mix exposure between foundry logic and <unk>.
Joe: Memory.
Joe: Are you able to you think at least match the market growth rate, just given kind of your mix relative to the market growth expectations. This year.
Steve: So that's why I made the statement that we believe in the second half we're back to normal from a demand standpoint. And as you think through all that, do you think that INM can show positive growth? Versus 23.
Joe: Yeah, Joe This is Steve thanks for the questions.
Joe: Yeah.
Steve Kelley: With regards to your first question our customers still are telling us that they think the 'twenty 'twenty four is roughly the same as 2023.
Steve: Steve, we're not sure. We haven't gone through that model yet, but I hope so. And one quick one for Paul, but thank you.
Steve Kelley: The other thing there is telling us is that the second half are better than the first half.
Steve Kelley: So essentially what we're looking at in semiconductor is is.
Paul R. Oldham: Decremental margin in the back half-averaged height. Is that how we should be thinking about 1Q and 2Q if revenue is down? Or can you do better than that? I think when you look at going from Q4 to Q1, we feel pretty good about holding margins at the 35% range. We think that's going to be a floor.
Steve Kelley: Our Q1, low point and a gradual recovery of the course of the year.
Steve Kelley: We are very well positioned for the node transitions that are going to transpire.
Steve Kelley: In the second half of this year.
So we are we're very confident in our ability to grow that business.
Steve Kelley: Second half 'twenty, four and into 'twenty five.
Steve Kelley: As far as our exposure to foundry logic and memory.
Paul R. Oldham: If revenue does tick down again, which we don't anticipate, then I think that's probably a reasonable range for decremental margins. Maybe a little bit less because we'll still have some improvement in material costs and we continue to reduce our manufacturing footprint as we go. I think the important thing, though, as margins start to recover or revenues start to recover, is that the incremental margins on the upside ought to be well north of 40%, and some quarters could be well over 50% as we get the benefit of these various factors coming together. So we're actually pretty excited as we continue to work this that we believe we've been able to reduce the revenue point at which we can get to 40% gross margin to this mid $400 million range per quarter. And look, if we're able to do that and we get to mid $400 million, our peak earnings, our earnings at that level will be substantially higher than our prior peak. And that's not even getting back to peak revenue levels.
Steve Kelley: You know, we don't have precise numbers on that we feel we're a little bit more exposed to foundry logic.
But I think as we look at the future memory processes.
Steve Kelley: We're also well positioned there so I think over time, we should benefit from both the node transitions in memory as well as the ones in foundry logic.
Speaker Change: Thanks for that and then just on the industrial medical side.
Speaker Change: Can you help us understand that the change in demand or what is incrementally weaker than last quarter. I think last quarter you highlighted a couple of different sub markets, but maybe just some help in terms of you know.
Speaker Change: Where you're seeing the incremental weakness from just because there's such a diverse business or market for you.
Yeah, the industrial medical market is an interesting one for US you know, we put a lot of our resources, there and a lot of emphasis there over the past two years.
Speaker Change: And what happened was in 2023 we set all kinds of records.
Speaker Change: Set a record the revenue.
Speaker Change: Revenue performance in A&M.
Speaker Change: And we also saw that our design win funnel increased by just under 50%. So we're very well positioned going into this year.
Speaker Change: I think when I take a look at that market you're right. It's it's it's thousands of customers hundreds of sub applications.
Speaker Change: In the industrial medical market was actually the worst market, where supply caught up with demand.
Speaker Change: That happened largely.
Speaker Change: In the second half of last year for advanced energy and is still going on.
Paul R. Oldham: So we've done a lot of good work. I think we're getting the foundation in place on gross margin. Obviously, the environment the last year and a half has been challenging with parts, but that's abated.
Speaker Change: At December competitors.
Speaker Change: So what our customers are dealing with is some inventory rebalancing.
And they're also dealing with the compressed lead times lead times not too long ago in this business were.
Speaker Change: <unk> 26 to 250 weeks and now they're about eight to 12 weeks.
Paul R. Oldham: We're now in a bit of a market soft spot, but the underlying setup for gross margin, we feel, is very good as we go forward. Appreciate that caller.
Speaker Change: So that creates a bit of an air pocket.
Speaker Change: What we think is that air pocket will last and for the first six months of 'twenty 'twenty four is the customers do their inventory rebalancing.
Paul R. Oldham: But just to level set, I think you earlier said that you might exit the year at a $400 million run rate. And so what you're talking about, I mean, that would be the early. Yeah, I think over the course of the year, we'd see some pick up in volume, and that would lead to some incremental growth, but you're right. Our projections at this point were that we would expect revenues to recover back to the $400 million level ending this year, and at that level, we ought to be able to deliver gross margins 250 to 300 basis points higher than Q1. So that would put you in the 37.5% to 38% range on roughly $400 million.
Speaker Change: And adjusted to new lead times.
Speaker Change: But we think it returns to normal in the second half of this year.
Speaker Change: And yeah. That's that's that's what we have in our plan.
Speaker Change: Thank you.
Speaker Change: Thanks Joanne.
Our next question is from the line of Krish Shankar with TD Cowen. Please proceed with your question.
Krish Sankar: Yeah, Hi, Thanks for taking my question that two of them first one Steve on the last point you made in terms of your customers on the semi side.
Krish Sankar: You know doing inventory rebalancing shorter lead time.
Krish Sankar:
Do you think that your customers revenue helped to recover first before you see a semi revenues recover.
Speaker Change: What do you think it could be in tandem or do you think you could lead the Irvine company.
Speaker Change: Yes, Chris just to clarify my comments.
On the inventory rebalancing.
Speaker Change: And the short lead times those those are back to the industrial medical market. So I was answering Joe's a second set of questions essentially.
Speaker Change: Oh gosh, what what do you think I put it on the <unk> side.
Speaker Change: On the semi side.
Speaker Change: You know I think all of our customers are.
Speaker Change: We're seeing pretty much the same thing right.
Paul R. Oldham: And just to calibrate that with Q4, that would be a 200 plus basis point improvement off of the Q4 levels at the same revenue level. I think that's what we're talking about, is we see a fundamental ability to improve gross margins and lower the revenue levels that it takes to deliver those gross margins. Great detail. Thanks.
Speaker Change: They've seen some some drop in trailing edge demand.
Speaker Change: Still relatively strong in China, but are starting to taper a little bit outside of China.
And you know from a.
Speaker Change: From a memory standpoint, there's an expectation that they'll see some recovery in DRAM around mid year and in NAND towards the end of this year.
Speaker Change: And in leading edge logic, I think there's a lot of excitement right now.
Speaker Change: About some node transitions that are underway.
So I think with a little pick up in smartphone demand continued demand in AI.
Mehdi Hosseini: You bet. Our next questions are from the line of Mehdi Hosseini with SIG. Please proceed with your question. Yes, thanks for taking my question. A couple of followers from my end for Steve and Paul, just going back to your commentary on how this year is looking to be more with it towards the second half. That's well understood, the beauty of love, small numbers. But how should I think about the second half of this year, 24 compared to the second half of 23? And I have a couple of other followers.
Speaker Change: In other computing areas I think that would be that should should pick up as well in the second half.
Speaker Change: Got it got it and then a follow up for Paul Paul I think you mentioned the March quarter gross margin should be about 35% I'm. Just curious you know hypothetically speaking if your June quarter revenue volume and product mix is similar to March at 350 million.
Speaker Change: And now that they have the benefit of the premium pricing going away and some of the factory closures.
How much would gross margins be in June quarter that if the revenue and product mix was similar to March.
Paul R. Oldham: Yeah, I think if you if you held everything else equal we ought to see modest improvement from there.
Paul R. Oldham: The March quarter to the June quarter, I think as you move further into the year, though we start to also get improvement from the continued factory transitions and other things that we're working on I think the important point here is we continue to feel that.
Paul R. Oldham: Yeah, I think what we said is we're seeing early signs of, you know, improvement, or that suggests there'll be improvement across most of our markets. So we do anticipate things picking up as we go through the year. And our best view is that we believe we can get back to revenues of four hundred million dollars or higher by exiting the year, which would be Q4. I think that's the best visibility that we have at this point. Sure. I guess we have the March quarter guide, we got a feel for June flat out, and we got December at 400 plus. We just need more color on the September quarter is what I was trying to figure out. Well, there's not that many numbers in between there, Mehdi.
Paul R. Oldham: As revenues move back up and get you know roughly say flat to the Q4 levels of around $400 million, we pill feel pretty confident towards the end of the year that that should yield gross margins that are 250 to 300 basis points higher than we had in Q1 and that's the combination of the last bit of materials Rolling out fact.
Paul R. Oldham: Improvements in efficiency coming in <unk>.
Paul R. Oldham: Recovery, just back to where we'd been running not actually anywhere near previous peak levels or high levels.
Paul R. Oldham: And so as revenues just get back to where we were or we think that's a meaningful improvement in gross margins.
Paul R. Oldham: Now as you look into next year because of the things that we'll be doing we've done already with the factory closures will be doing with that.
Paul R. Oldham: You know other a factory efficiencies. This year, we think that we can get gross margins to around 40, 40% on revenues in the mid $400 million range and that's better than what we've been modeling.
Paul R. Oldham: So, you know, I don't think we have perfect visibility into what the pattern will be during the year. You know, look, CEMI, you know, continues to bounce around the bottom. This is a bit lower than Q1, than Q4. But we think that's going to improve. I think there's early signs of data center improvement. That can be lumpy.
Paul R. Oldham: To now where we thought we'd take me to get to the mid to high $400 million range. So we think there is a lot of a lot of upside in the company for gross margins. Obviously, the biggest factor impacting US now is just the revenue levels in.
Paul R. Oldham: In fact things we've done we think we're actually protecting gross margins at 35%, which is only down 70 basis points on the on the drop in volume. We've seen so we think the soda forms the foundation for you know our gross margin acceleration as revenues revenues recover from this point.
Paul R. Oldham: That could come sooner, and it could come, you know, in a bump, right? I think industrial medical will be more paced, as Steve said earlier. And telecom is going to sort of glide, or slow down a little bit. So, you know, it's hard to say exactly how the quarters will play out.
Speaker Change: So it depends a lot Paul thanks, Steve.
Speaker Change: [laughter].
Speaker Change: Our next question is from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Paul R. Oldham: I think in the near term, we have pretty good visibility. And as we look out towards the end of the year, we see enough factors that give us confidence to get back to $400 million or higher, but it's a little hard to project each quarter. That's fair, and I appreciate all the details.
Speaker Change: Thanks.
Robert Stephen Barger: Steve most industrial companies, we cover are saying what you just did which is weak first half returned to normal and back half, but can you talk more about why you think that just where that confidence comes from and do you expect I am I N M can show positive growth for the year in 2024.
Speaker Change: Yeah, So so basically Steve.
Speaker Change: I think I N M is always going to be inherently more difficult given the number of customers who are dealing with a number of different submarkets.
Steve: One follow-up here, and I think it would be very helpful if you could give us some thoughts around ASB. Obviously, two years ago, the industry was faced with insufficient supply, and there was a significant price increase for all the semiconductor components. And I believe some of that price increase was passed on to the end customer. As we go through this inventory correction and the weaker end-market demand, how are you positioning the company for pricing leverage, especially in this core semi-cap? Could your customers wait until the last minute to get any kind of concession? And I'm just wondering how we should think about that.
Speaker Change: And so we we look to a couple of things.
Speaker Change: You know.
Speaker Change: One key indicator for us is distribution.
Speaker Change: So we sell about 45% of or iron and products through distributors.
Speaker Change: And if you know we took a look at the data and you know a few things.
Speaker Change: Kind of a standout.
Speaker Change: One is the resales, so resales that our top five distributors around the world have grown every quarter since Q2 of 22.
Speaker Change: So we basically exited.
Speaker Change: 23.
Speaker Change: At a very high reseal rate.
Speaker Change:
Speaker Change: It also shows that we have gained power share power subsystem shared all of our major distributors over the past year.
Speaker Change: Entered our top three distributors Ae's now number one.
In the category of power subsystems.
Speaker Change: So I think those are all positive indicators that show.
Steve: Yeah, so let me just kind of retrace our steps over the past couple of years during the supply chain crisis. Many of our customers chose to pay premiums, so it wasn't a price increase per se. But we would go out on the third-party market to find these scarce chips, and then they would pay the premium that we had to pay for those particular ICs or MOSFETs. And so, as Paul explained during his presentation, most of those premiums have gone away. We had some other customers who preferred price increases. In those cases, we worked with them. You know, the first step is to get price decreases from our IC suppliers and MOSFET suppliers. And quite frankly, that's been a bit of a challenge.
Speaker Change: We have some momentum in this market.
Speaker Change: And at our you know our design wins are having some impact on our revenue already.
Speaker Change: I think the second thing.
Speaker Change: That gives me confidence is that.
Speaker Change: If you take a look at the industrial medical market, but we were still chasing parts through the first half of last year. So there's still a fair amount of delinquencies, we closed out those delinquencies in the second half of last year.
Speaker Change: And so what's happening is the customers are have different levels of inventory because there are a lot of different parts in the system today built.
Speaker Change: And so they're working through the inventory and doing the inventory rebalancing. The other big change your customers are dealing with as lead times.
Speaker Change: The lead times have contracted significantly and that creates a bit of an air pocket.
Speaker Change: So that's why I made the statement that we believe second half, where we're back to normal from a demand standpoint.
Speaker Change: And as you think through all that deep deep do you think that can show positive growth for the year versus 'twenty three.
Speaker Change: Steve we're not sure we havent gone through that model, yet, but I hope so.
Paul R. Oldham: So we're working hard to move our IC and MOSFET costs down, but they went up a lot faster than they're coming down. Okay, thank you, Stephen. A quick follow-up for Paul. APEX in 2024? Should we assume there's kind of a flattish growth from here on?
Speaker Change: And one quick one for Paul but thank you.
Speaker Change: Decremental margin in the back half averaged high 30% range is that how we should be thinking about <unk> and QQ. If revenue is down or can you do better than that.
Speaker Change: Okay.
Speaker Change: I think when you look at going from Q.
Paul R. Oldham: You know Q4 to Q1, we feel pretty good about holding margins at the 35% range, we think that's going to be a floor.
Paul R. Oldham: I think sort of flattish, or certainly that's what we got it to for Q1. I think Q2 will be similar. And flat means it could bounce around a little bit, plus or minus.
Paul R. Oldham: If if.
Paul R. Oldham: If revenue does tick down again, which we don't anticipate that I think that's probably a reasonable range for decremental margins may be a little bit less because we'll still have some improvement in material costs and we continue to reduce our manufacturing footprint. As we go I think the important thing, though as margins start to recover or revenue start to recover.
Paul R. Oldham: Because we get into the second half, we'll see how revenues, you know, recover. There could be a little bit of an increase in the second half, more based on inflation and other factors. But in any event, you know, we don't anticipate operating expenses going up.
Paul R. Oldham: Is that the incremental margins on the upside ought to be well north of 40% and in some quarters could be well over 50 as we get the benefit of these various factors coming together. So we're actually pretty excited as we've continued to work this.
Paul R. Oldham: You know, we have a good cost structure. We've worked hard to get it down from where we left off a year ago. We want to sort of try to live within that cost structure. We're funding our priorities.
Paul R. Oldham: We believe we've been able to reduce the revenue point at which we can get to 40% gross margin to this mid $400 million range per quarter and look if we're able to do that and we get to mid $400 million. Our peak earnings our earnings on that level will be substantially higher than our prior peak and that's not even.
Paul R. Oldham: We're making, you know, great progress on our NPI and other strategic initiatives. So I think we're going to try to stay roughly within this envelope. But I'd say, you know, maybe a little bit of an increase in the second half, just based on normal factors. Mehdi, let me just answer the pricing issue. Can I just add a little more color?
Paul R. Oldham: Getting back to peak revenue levels. So.
Speaker Change: We've done a lot of good work.
Speaker Change: I think we're getting the foundation in place on gross margin, obviously the environment the last year and a half has been challenging with parts. That's abated, where you are now in a bit of a market soft point, but the underlying setup for gross margin. We feel is very good as we go forward.
Steve: Because I think your question was more about what leverage we might have moving forward on the price, and I think it's really about new products. And in SEMI, in INM, even in data centers, you know, we're bringing products to market now that offer more value to customers and offer more profits to us. And that's how we plan to, you know, move our profitability up together with the actions we're taking in manufacturing. Thank you, Steve.
Speaker Change: I appreciate that color, but just to level set I think you earlier said that that you might exit the year at a $400 million run rate and so what you are talking about I mean that would be the earliest that you are running an incremental most likely right.
Speaker Change: Yeah, I think over the course of the year, we'd see some pick up in volume and that would lead to some incremental but you're you're right on.
Our projections at this point was that we would expect revenues to recover back to the 400 million dollar level exiting this year and at that level, we ought to be able to deliver gross margins 250 to 300 basis 300 basis points higher than Q1, So that would put you in the 37, 5% to 38% range on roughly 400 million.
Operator: Thank you. Our next question is from the line of Scott Graham with Seaport Research. Please proceed with your question. Hey, good evening.
Speaker Change: And just to calibrate that with Q4 that would be a 200 plus basis point improvement off of off of the Q4 levels at the same at the same revenue level I think that's what we're talking about is we see fundamental ability to improve gross margins and lower the revenue levels that it takes to deliver those gross margins.
Scott Graham: Thanks for taking my questions. I wanted to maybe talk a little bit more about the gross margin. Are you guys saying that the premiums had no effect on the fourth quarter gross margin? Yeah, no, what I said is that we did have some effect. We think that's sort of in the 50 to 100 basis points.
Great detail. Thanks.
Speaker Change: You bet.
Speaker Change: Our next questions are from the line of Mehdi Hassani with S. A G. Please proceed with your questions.
Mehdi Hosseini: Yeah, Seth Thanks for taking my question a couple of follow ups from my end sports Steven Paul just going back to your commentary hard. This year is looking to be more weighted towards the second half that's well understood the beauty of.
Mehdi Hosseini: Log small numbers, but how should I think about a.
Paul R. Oldham: So that's continued to come down every quarter, and I think what we said as we ended the quarter was that it was approaching normal levels. So I think our, you know, very end of the quarter exit rates were pretty small. But that just means that those costs largely just need to roll through inventory now. So, you know, expect that same 75 basis point improvement to kind of flow through over the next quarter, quarter and a half. That's part of how we protect staying at 35.
Speaker Change: Second half of this year 24, compared to second half of 'twenty, three and I have follow ups.
Speaker Change: Yes, I think what we said is we're seeing early signs of.
Speaker Change: No improvement or that suggest there'll be improvement across most of our markets. So we do anticipate things picking up as we go through the year and our best view is that we believe we can get back to revenues at $400 million are higher exiting the year, which would be Q4, I think that's the best visibility that we have.
Speaker Change: At this point.
Speaker Change: Sure.
I guess, we got the March quarter Guide, we got a feel for June flat to up we got the December at 400 plus.
Speaker Change: We just need some more color on September quarter as.
That's what I was trying to figure out.
Paul R. Oldham: Part of getting that baseline as we go forward is that those premiums are largely washed out. But there'll be a little bit more in the, you know, first few months. But in terms of an ongoing activity, we think that's largely normalized. Okay, okay. So is there a case here, Paul, where I think you just answered it, but I'm not sure on the math.
Speaker Change: Well theres not that many numbers in between their <unk>. So you know I don't think we have.
Speaker Change: Perfect visibility to what the pattern will be during the year, you know look sami's.
Speaker Change: <unk> continues to bounce around the bottom this is at a bit lower than Q1 and Q4, but we think that's going to improve I think there's early signs of datacenter improving that can be lumpy that could come sooner and it could come in a in a bump right I think industrial medical be more paced as Steve said earlier and telecom is going to sort of glide glide path down a little bit.
Paul R. Oldham: Are you saying that, sort of, in the second half of the year, as we roll through sales, and the gross margin should start to naturally move up because, The sales are no longer burdened by the premiums of the gross, gross income dollars go up, and the gross margin dollar, and gross margin percent go up with it. Is that the right way to look at it? Yeah, said another way, the headwind that we've had over the last year, which has been dying down, but headwind nonetheless, that dissipates completely after, say, the first quarter or a little bit into the second.
So.
Speaker Change: It's hard to say exactly how the quarters will play out I think the near term, we have pretty good visibility and as we look out towards the end of the year. We have we see enough factors that give us confidence to get back to the $400 million are higher but it's a little hard to project each quarter.
Speaker Change: That's fair and I appreciate all the detail one follow up here and I think it will be very helpful. If you could.
Give us some thoughts around a S. B, obviously two years ago industry was faced with insufficient supply.
Speaker Change: And there was a significant price increase for all the semiconductor components and I believe some of that.
Speaker Change: Price increase was passed on to the end customer as we go through this inventory correction in the weaker end market demand.
Speaker Change: How are you positioning the.
Paul R. Oldham: So that means that going forward, we don't have that headwind. But as volume picks up and other things improve, then we can get that all the way to the bottom line. But I think the other thing is the improvements that we're making in the factories and efficiency from a cost perspective, and even a little bit of mix as we're getting some product benefit, you know, from a sole source perspective, and sole source mix, you know, towards the end of the year, all of those things really start to fall through. And that's why on similar revenue levels, you know, in the fourth quarter to what we had this year Yep, thank you.
The company you Corp.
Speaker Change: Pricing.
Speaker Change: Leverage, especially in the core semi cap could your customers wait till last minute to get any kind of concession and I'm. Just wondering how we should think about it.
Speaker Change: Yeah. So let me just kind of retrace their steps over the past couple of years during the supply chain crisis.
Speaker Change: Many of our customers chose to pay premiums so it wasn't a price increase per se.
Speaker Change: But we would Oh go out on the.
Speaker Change: The third party market defined these scarce chips and then they would they would pay the premium that we had to pay for.
Speaker Change: For those particular Ics are MOSFET.
Speaker Change: And so I think as Paul explained during his presentation.
Speaker Change: Most of those premiums have gone away.
Speaker Change: We had some other customers who preferred price increases.
Speaker Change: And in those cases.
Speaker Change: We're working with them.
Speaker Change: The first step is to get the price decreases from from our IC suppliers MOSFET suppliers and quite frankly, that's been a bit of a challenge.
Speaker Change: So we're working hard to move our IC and MOSFET costs down but.
Speaker Change: They went up a lot faster and they are coming down.
Speaker Change: Okay. Thank you, Steve and quick follow up for Paul at.
Speaker Change: Opex in 'twenty four.
Paul R. Oldham: Should we assume this kind of a flattish from here on.
Paul R. Oldham: I think sort of flattish or certainly that's what we guided to for Q1, I think Q2 will be similar.
Scott Graham: I think we're saying the same thing. Steve, I was hoping you could tell us a little bit more about, you know, sort of this. It seems like another push to the right. Because, you know, the numbers that we're hearing for WFE, obviously, they started, you know, six months, a year ago; they were in the down 20s. And then they came in from that to downs 10s and 15s. And I'm just wondering why, given Mark's conditions.
Paul R. Oldham: And flat means it could bounce around a little bit plus or minus because we get in the second half, we'll see how revenues.
Paul R. Oldham: We cover there could be a little bit of increase in the second half.
Paul R. Oldham: Based on inflation and other factors.
Paul R. Oldham: But in any event, we don't anticipate operating expense going up.
Paul R. Oldham: Have a good cost structure, we've worked hard to get it down from where we exited at a year ago, we want a soil so try to live within that cost structure, we're funding our priorities.
Paul R. Oldham: We're making great progress on our NPI and other strategic initiatives. So I think we can try to stay within roughly within this envelope, but I'd say you know maybe a little bit a little bit of increase in the second half just based on normal factors.
Steve: It's still difficult, but seemingly less difficult. Why is it kind of going the other way for you? Yes, Scott. I think if you take a look at the data, you know, we sell into Edge and Deposition Applications, Ion Implant Applications, so more conventional applications within the semiconductor process universe. We do not sell into lithography.
Speaker Change: And maybe let me just take my answer on the pricing issue. Okay can I just add a little more color.
Speaker Change: I think your question was more about about what leverage we might have moving forward on the price and I think it's really about new products.
Speaker Change: And in semi in I N M. Even a data center you know, we're bringing products to market now that offer more value to the customers and and offer more profits to us.
Steve: So if you extract the litho WFE, then I think you'll find that we're actually gaining share in that particular part of the market. I think what's important to realize, though, is that the share gains are going to happen with the next generation processes. So that's why I spend so much time talking about Everest and EVOS because those are two new flagship technologies which have been eagerly embraced by customers, and we think they are going to drive real share gains for the company over the next three to five years. Okay, last question. I promise. The, The debt offering that you did last fall, you know, kind of sitting and waiting for an acquisition to deploy that on, could you just give us an idea how the funnel is looking? Is this sort of a?
Speaker Change: And that's how we plan to you know to move our profitability up together with.
Speaker Change: The actions, we're taking in manufacturing.
Speaker Change: Got it thank you Steve.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Scott Graham with Seaport Research. Please proceed with your questions.
Scott Graham: Hey, good evening, Thanks for taking my questions guys.
Scott Graham: I wanted to maybe talk a little bit more about the gross margin or are you guys, saying that the premiums had no effect on our fourth quarter gross margin.
Yeah, No what I said.
Scott Graham: So it did have some effect, we think that sort of in that 50 to 100 basis points. So that's continued to come down every quarter.
Scott Graham: And I think what we said is we ended the quarter. It was approaching normal levels. So I think our you know Barry ended the quarter exit rates per was pretty small, but that just means that those costs largely just need to roll through inventory now so.
Scott Graham: We expect that that same whatever 75 basis point improvement to kind of flow through over the next quarter quarter and a half that's part of how we protect staying at 35.
Steve: A modest setback in earnings here is, does that slow that process down, or is that still full speed ahead, and you're getting closer and closer to something? Just maybe sketch out kind of where you're at. Yeah, yeah, just let me just give you some context.
Scott Graham: Part of setting that baseline as we go forward that those premiums are largely washed out, but there'll be a little bit more than that in the first few months, but in terms of an ongoing activity. We think that's largely normalized.
Speaker Change: Okay. Okay. So is there a case here Paul where.
Speaker Change: I think you just answered it but I'm not sure on the match or are you, saying that like sort of in the second half of the year.
Speaker Change: As we roll through sales and.
Speaker Change: The gross margin should start to naturally move up because the sales are no longer.
Steve: You know, this is a modest speed bump for us. It doesn't really impact any of our activities. So we're going full speed ahead on development, and we're going full speed ahead on M&A. Our M&A approach hasn't changed. We're basically looking at two tracks. The first track is technology tuck-ins. Those would be primarily for semiconductor applications.
Speaker Change: Burdened by the premium so the gross.
Speaker Change: Gross income dollars odd goes up in the gross margin dollar gross margin percent goes up with it is that the right way to look at it.
Speaker Change: Yeah. It said another way the headwind that we've had over the last year, which is I've been dying down but headwind nonetheless that that dissipates completely after say the first quarter or a little bit into the second so that's that means that going forward, we don't have that headwind, but so as volume picks up and other things improved and we get that all the way.
Steve: And the other track is, you know, basically larger acquisitions, and we are in contact with our targets. And we certainly have the money to deploy when we reach an agreement with one or more of these targets. But we're in no hurry.
Speaker Change: <unk> all the way to the bottom line, but I think the other thing is the improvements that we're making in the factories and efficiency from a cost perspective.
Speaker Change: And even a little bit of mix as we're getting some some product benefit from a sole source perspective, so source mix.
Speaker Change: Towards the end of the year all of those things really start to fall through and that's why on similar revenue levels. You know in the fourth quarter to what we had the issue in the fourth quarter, we ought to be doing roughly 200 basis points better or as I said 250 to 300 basis points better than where we're starting the year.
Steve: We want to make sure that the deals we engage in make strategic sense and make financial sense for the company. And then, you know, we'll basically deploy the same playbook we use with SL Power. We'll integrate quickly and maximize our synergies as fast as we can. And I'll just remind you, Scott, also that when we did the debt offering, one of the beauties of that was that it gave us optionality as well. So we don't have to be in a hurry; we can be patient.
Speaker Change: Okay. Thank you I think we're saying the same thing.
Speaker Change: Steve I was hoping you could tell us a little bit more about you know sort of this.
Speaker Change: Seems like.
Speaker Change: Another pushed to the right and semi because you know the the numbers that we're hearing for Wi Fi.
Steve: Obviously, they started six months a year ago. They were in the down Twenty's and then they came in from that two downs tens and fifteens and I'm just wondering why.
Steve: With market conditions.
Speaker Change: Yeah, she's still difficult, but seemingly less difficult why is it kind of going the other way for you.
Paul R. Oldham: There are other things we can do to deploy that cash that add value to the company, including arbitraging our debt next fall if that's something that makes sense at the time. So we have a lot of options and that I think gives us flexibility to be smart, to be patient, and make sure we're doing the right thing. Okay, thank you. As a reminder, if you'd like to ask a question today, you may press star 1 on your telephone keypad.
Speaker Change: Yes, Scott I think if you take a look at the data we sell into.
Speaker Change: Etch and deposition applications ion implant applications. So so more conventional applications within the semiconductor process universe, we do not sell into litho.
Speaker Change: So if you if you extract the litho.
W. A fee then I think you'll find that we're actually gaining share in that particular part of the market.
Speaker Change:
Speaker Change: I think what's important to realize though is is the share gains youre going to happen with.
Speaker Change: With the next generation processes.
Speaker Change: So that's why I spend so much time talking about Everest and <unk> because those are two new flagship technologies, which had been.
Speaker Change: Eagerly embraced by the customers.
Speaker Change: And we think they are going to drive real share gain or for the company over the next three to five years.
Operator: The next questions are coming from the line of Jim Raschutte with Needham & Company. Please receive your questions... Hi, thanks. I've answered most of the questions. I'm just curious, though, as we think about 2024, the way you describe the year, if that plays out that way, as you layer in some of the e-commerce activity you've talked about, working more on the distributor front, does any of that have the potential to add incrementally to revenues in a meaningful way this year? Or is that more like 25? That's a good question, Jim.
Speaker Change: Okay last question promise.
Speaker Change: The.
Speaker Change: The debt offering that you did last fall.
Speaker Change: And of sitting and waiting for an acquisition too.
Speaker Change: Deploy that on could you just give us an idea how the funnel is looking is this sort of.
Speaker Change: A modest setback in earnings here is does that slow that process down or is that still full speed ahead, and you are getting closer and closer to something just maybe sketch sketch out kind of where you're at.
Speaker Change: Yeah, Yeah, just let me just give you. Some context you know this this is a modest speed bump for us.
Speaker Change: It doesn't really impact any of our activities.
Speaker Change: So we're going full speed ahead on development, we're going full speed ahead on M&A.
Speaker Change: In our M&A approach hasn't changed.
Speaker Change: We're basically looking at two tracks. The first track is technology tuck ins those would be primarily for.
Steve: I think we have the ability to add incremental revenues this year and next year. You know, we actually launched the website in August of last year, and we saw an immediate uptick in engagement and downloads and so forth. So I think some of that work is already underway. And I'm encouraged by what I've seen so far. And that will continue throughout this year, right?
Speaker Change: For semiconductor applications.
Speaker Change: And the other track is as you know basically larger out acquisitions.
Speaker Change: And.
Speaker Change: We are in contact with our targets.
Speaker Change: And we certainly have the money to deploy.
Speaker Change: When we reach agreement with one or more of these targets, but we're in no hurry, we want to make sure that the deals we engage and make strategic sense make financial sense for the company.
Speaker Change: And then.
Steve: So it's much easier for customers now to engage with us than it was six months ago. And as we add e-commerce to our website later this month, they'll be able to get samples of our products very quickly and make their decision more quickly. So I'm encouraged by that and also by the enthusiasm within our distributors because they are seeing how popular our products are. And they are also encouraged because they tend to make more money selling our subsystems than they do selling ICs. And so that certainly makes a difference, and we're seeing a lot more enthusiasm for both power and advanced energy through our distributor channel. Thanks a lot.
Well basically deploy the same playbook, we used with S. O power will integrate quickly and maximize our synergies as fast as we can.
Speaker Change: Yes, and I'll, just remind remind you yeah I'll just remind you Scott also that.
Speaker Change: When we did the debt offering one of the beauties of that was that it gives us optionality as well. So we don't have to be in a hurry we can be patient.
Speaker Change: Other things, we can do to deploy that cash that add value to the company, including arbitrage our debt next fall if that's <unk>.
Speaker Change: That's something that that makes sense at the time. So we have a lot of options and that I think gives us flexibility to be smart.
Speaker Change: Patient and make sure we're doing we're doing the right thing.
Speaker Change: Okay. Thank you.
Speaker Change: As a reminder, if you'd like to ask a question today you May press star one from your telephone keypad.
Speaker Change: The next question is coming from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question Hi.
Jim Ricchiuti: Hi, Thanks, most of my questions were.
Steve: Good luck. Thank you. Our next question is from the line of Dufan Janj with Bank of America. Please take your question. Hi, yeah, thanks for taking the question. I want to go back to an earlier Semi's question.
Jim Ricchiuti: Answered I was just curious as we think about 2024, if we the way you're describing the year if that plays out that way I'm wondering.
Jim Ricchiuti: As you.
Layer in some of the e-commerce activity, you've talked about working more on the distributor front is there.
Jim Ricchiuti: Does any of that have the potential to add incrementally to the the revenues in a meaningful way this year or is that more 25.
Dufan Janj: So you said excluding litho, you're potentially gaining share in some of the areas. But if we look at one of your lead edge customers, they've posted a strong December, and even looking into March, they've had a flattish outlook, whereas I think your semis outlook is a little bit falling behind. So I just want to understand that disconnect between you and some of your customers. Yeah, basically, there's two issues there. One is inventory that some of our customers are still carrying, right? And the second is timing.
Jim Ricchiuti: Yeah.
Jim Ricchiuti: Yeah.
Speaker Change: That's a good question Joe or Jim.
Speaker Change: I think.
Speaker Change: We had the ability to add incrementally to revenues this year and next year.
Speaker Change: You know when we actually launch the website in August of last year, and we saw an immediate uptick in engagement and the downloads and so forth. So I think some of that work is already underway.
Speaker Change: So I'm encouraged by what I've seen so far.
And that will continue throughout this year right. So it's much easier for customers that are engaged with us than it was.
Speaker Change: Six months ago.
Speaker Change: And as we add e-commerce to our website later this month.
Speaker Change: They'll be able to.
Speaker Change: Get samples of our products very quickly and make their decision more quickly.
Speaker Change: So so I'm encouraged by that and also by the enthusiasm and.
Steve: Because typically, we'll be shipping products to a customer the quarter before they ship their products to their end customers. So, you know, sometimes it's two quarters before. And so it's very hard to correlate our results with our customers' results on a quarter by quarter basis.
Speaker Change: Within our distributors.
Now that they're seeing how popular our products are.
Speaker Change: And they also are encouraged because they tend to make more money selling our subsystems than they do selling Ics.
Speaker Change: So it certainly makes a difference and we're seeing a lot more enthusiasm for both power.
Speaker Change: And advanced energy through our distributor channel.
Speaker Change: Thanks, a lot.
Speaker Change: Luck.
Speaker Change: Thanks, Jim.
Speaker Change: Our next question is from the line of Tucson charged with Bank of America. Please proceed with your question.
Tucson: Hi, yes, thanks for taking the question.
Dufan Janj: And then on to gross margins. So I think exiting this year, you're targeting 57 to 57 and a half, but you still have another two to 300 basis points in order to reach the 40% mark. So what other kind of tailwinds do you have now? You don't have that inventory normalization anymore.
Tucson: I wanted to go back to an earlier sami's question. So.
Tucson: You said, excluding litho, you're potentially gaining share in some of the areas.
Tucson: But if you look at one of your lead etch customer.
Tucson: <unk> posted a strong December.
Tucson: And even looking into March they've had flattish outlook, whereas I think your studies outlook is a little bit falling behind so I just want to understand that disconnect between you and your some of your customers.
Speaker Change: Yeah, basically there's two issues there one is inventory that our some of our customers are.
Speaker Change: You are still carrying right and the second is timing because typically we will be shipping products into a customer.
Paul R. Oldham: Potentially, you have the factory optimization, but is that really enough to get you that two to 300 basis points thing? Yeah, so that's right. We would be exiting the year based on what we said in our prepared comments, somewhere between 37.5% and 38% gross margins. As we look into then into 2025, what are the other things? There are still more activities on the factory consolidation front.
Speaker Change: Quarter before they ship their products to their end customers. So you know, sometimes it's two quarters before.
Speaker Change: And so it's very hard to correlate our results with our customers' results on a quarter by quarter basis.
Speaker Change: Got it got it.
Speaker Change: And then onto gross margin. So I think exiting this year, you're targeting 57 to 57 in the house, but you still have that another two to 300 basis points in order to reach the four the 40% Mark.
Speaker Change: So what other kind of tailwind do you have now.
Speaker Change: That inventory normalization anymore.
Speaker Change: Potentially you have the factory optimization.
Speaker Change: But is that really enough to get you that two to 300 basis points. Thanks.
Speaker Change: Yes, so that's right we would be exiting the year based on what we said in our prepared comments somewhere between 37, and a half and 38% gross margins.
Paul R. Oldham: I think that the full benefit of that certainly bleeds into the first half of 2025 as we execute our plans over the course of the full course of 2024. I think that's another 100 basis points that could come through for sure. I think the second thing is we start to see more benefit from our shift in mix as we have more sole source products. That could add another 50 or more basis points.
Speaker Change: As we look and then into 'twenty five what are the other things there are still more activities on the factory consolidation front I think that the full benefit of that certainly bleeds into the first half of 'twenty four 'twenty five as we execute our plans over the course of the full course of 2024, I think that's another 100 basis points and that could come through for sure.
I think the second thing is we start to see more benefit from our shift in mix as we have more sole sourced products.
Speaker Change: That could add another 50 or more basis points over time over a couple of years, we think that could be as much as another 150 or 200 basis points in total, but certainly I think in there.
Paul R. Oldham: Over time, over a couple of years, we think that could be as much as another 150 or 200 basis points in total, but certainly, I think in the early 25 range, there's easily 50 basis points and a better mix and sole source products there. The last thing is while this year has got a bit of a front end air pocket, as Steve said, I think it will exit back on a rate that's increasing. I think, generally, the market views 2025 as a pretty strong year, which we'll benefit from, regardless of our new products, the channel investments, and everything else. Those will be accelerators.
Speaker Change: In the early 25 range I think there's easily 50 basis points and better mix in sole source products there and the last thing is we.
Speaker Change: While this year has got a bit of a front end air pocket as Steve said I think it it exits back on it on a rate that's increasing and I think generally the market views 25 is a pretty strong year, which will benefit from irregardless of our new products the channel investments and everything else those are the accelerators and.
Paul R. Oldham: That's why we look into 2025. We think that'll be a strong year. As we said, if we can get back to $450 million, roughly the mid $400 million range, that's going to yield just with the volume impact margins of around 40%. We feel pretty good about that when you look out in time because of the work we're doing now, the setup of things we can control in terms of managing our cost structure, getting that where we'd like it, getting the foundation for gross margin in place, the investments in new products, Look, that mid $400 million, as I said earlier, isn't even peak revenue for us from the last up cycle. If you ran that out to a peak revenue level, I think we'd be well in excess of 40% gross margin.
So that's why we look into 2025, we think that'll be a strong year and as we said if we can get back to $450 million roughly mid $400 million range, that's going to yield just with the volume impact at margins in the around 40%.
So you know.
Speaker Change: So we feel we feel pretty good about about that when you look out in time because of the work. We're doing now to set up things. We can control in terms of managing our cost structure getting that where we'd like it getting the foundation, but gross margin and place the investments in new products, an opportunity to gain share of the investments in channel. We think all of that positions us well to see really nice earnings.
Speaker Change: Growth. This would go into 2025 and looked at mid $400 million as I said earlier isn't even peak revenue for us from that from the last up cycle. So if you ran that out to a peak peak peak revenue level, I think we'd be well in excess of 40% gross margins.
Speaker Change: Thank you.
Paul R. Oldham: Thank you. Our final question today is from the line of Mark Miller with Benchmark. I'm just wondering if you're seeing any impact of the slowing in EV sales, especially at second-tier foundries. Your question, Mark, was whether we're seeing any impact of the slowing in EV sales. We really have very little direct exposure to that market. There's some indirect exposure for our work with IC makers who are building silicon carbide chips and empower MOSFETs and so forth. But at this point, we haven't seen any meaningful impact. And what about the funding by the US, Europe, and Japan for internal chip production? Is that going to become a driver in 2025?
Speaker Change: Thank you.
Speaker Change: Our final question taste from the line of Mark Miller with benchmark. Please proceed with your questions.
Mark S. Miller: I'm just wondering if you're seeing any impact of a slowing in EV sales, especially at the second tier foundries.
Yeah.
Mark S. Miller: Your question Mark was whether we're seeing any impact in the slowing of EV sales.
Mark S. Miller: We really have very little direct exposure to that market.
Mark S. Miller: There's some indirect exposure through our work with.
Mark S. Miller: Our IC makers, who are building silicon carbide chips, and empower MOSFET and so forth.
But at this point, we haven't seen any meaningful impact.
Mark S. Miller: And what about the funding by the U S Europe, and Japan for internal chip production is that going to become a driver in 2025.
Speaker Change: I think it will.
Mark S. Miller: I think it will, Mark. Obviously, that benefits our customers, the equipment customers, and anything that benefits them ultimately benefits us. So we think building these geographical ecosystems is a good thing for the industry, and it'll be a good thing for us.
Speaker Change: Mark.
Mark S. Miller: Ever see that that that benefits our customers are the equipment customers.
Mark S. Miller: It benefits them ultimately benefits us so.
Mark S. Miller: So we think they're building these.
Mark S. Miller: Geographical ecosystems as a good thing for the industry and it'll be good thing for us.
Steve: Thank you. Thank you. Ladies and gentlemen, this concludes our question and answer session, and I'll also conclude today's conference. You may now disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.
Speaker Change: Thank you.
Speaker Change: Thank you ladies and gentlemen. This concludes our question and answer session and will also conclude today's conference. You may now disconnect. Your lines at this time and we thank you for your participation have a wonderful day.