Q1 2024 Advanced Energy Industries Inc Earnings Call
Speaker Change: [music].
Operator: Greetings and welcome to the Advanced Energy First Quarter 2024 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. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Edwin Mock, Vice President of Strategic Marketing and Investor Relations. Thank you, Edwin. You may begin.
Greetings and welcome to the advanced Energy first quarter 2024 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.
Pleasure to introduce to you Edwin Mok, Vice President strategic marketing and Investor Relations. Thank you Edwin you may begin.
Edwin Mock: Thank you, operator. Good afternoon, everyone.
Edwin Mok: Thank you operator, and good afternoon, everyone welcome to advanced Energy first quarter 2024 earnings Conference call.
Edwin Mock: Welcome to Advanced Energy's first quarter 2024 earnings. With me today are Steve Kelley, our President and CEO, and Paul Oldham, our Executive Vice President. You can find our earnings press release and presentation on our website at ir.fm. 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 results. Information concerning these risks can be found in our SCC file.
Edwin Mok: With me today are Steve Kelley, our president and CEO and Paul Oldham, Our executive Vice President and CFO.
Edwin Mok: Can find our earnings press release and presentation on our website at IR <unk>.
Edwin Mok: Dot com.
Edwin Mok: Let 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.
Edwin Mok: Information concerning these risks can be found in our SEC filings.
Edwin Mock: All four looking statements are based on management's estimates as of today, May 1st, 2024, and the company assumes no obligations at all. Any targets beyond the current quarter presented today should not be interpreted as... On today's call, our financial results are presented on a non-GAF financial basis unless otherwise stated. Excluded from non-GAAP results are stock compensation, amortization, acquisition-related costs, restructuring and impairment charges, and unrealized foreign exchange gains or losses. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.
Edwin Mok: All forward looking statements are based on managements estimates as of today May <unk> 2024, and the company assumes no obligation to update them.
Edwin Mok: Any targets beyond the current quarter presented today should not be interpreted as guidance.
Edwin Mok: On today's call all financial results are presented on a non-GAAP financial basis, unless otherwise specified.
Edwin Mok: Excuse on non-GAAP results, all stock compensation amortization acquisition related costs restructuring and impairment charges and unrealized foreign exchange gains or losses.
Edwin Mok: A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release.
Edwin Mok: With that let me pass the call to our President and CEO, Steve Kelley.
Stephen D. Kelley: Thanks Edwin.
Stephen D. Kelley: Thanks, everyone. Good afternoon, everyone, and thanks for joining the call. We had a challenging first quarter. Although semiconductor revenue was stronger than expected, revenue in our other markets was weaker than forecast. We believe that our revenue shortfall was due largely to pockets of inventory, which developed at OEMs and distributors after supply chain constraints were resolved towards the end of 2023. Although we expected an inventory correction, we underestimated its magnitude.
Stephen D. Kelley: Afternoon, everyone and thanks for joining the call.
Stephen D. Kelley: We had a challenging first quarter.
Stephen D. Kelley: Although semiconductor revenue was stronger than expected.
Stephen D. Kelley: Revenue in our other markets was weaker than forecasted.
We believe that our revenue shortfall was due largely to pockets of inventory.
Stephen D. Kelley: Which developed at Oems and distributors.
Stephen D. Kelley: After supply chain constraints were resolved.
Stephen D. Kelley: Towards the end of 2023.
Stephen D. Kelley: Although we expected an inventory correction.
We underestimated its magnitude.
Stephen D. Kelley: Despite these issues, we were still able to achieve our gross margin target and Deliver Earnings within our guidance range. Our outlook for the remainder of 2024 is more encouraging. In the second quarter, we expect revenue to rebound sequentially, driven mostly by strength in the data center computing market. We also expect revenue to grow in the second half of the year, as semiconductor revenue gradually improves. The industrial medical market is beginning to normalize, and the data center computing market continues to strengthen. Although we are carefully controlling spending, we continue to invest in R&D.
Stephen D. Kelley: Despite these issues, we were still able to achieve our gross margin target.
Stephen D. Kelley: To deliver earnings within our guidance range.
Stephen D. Kelley: Our outlook for the remainder of 'twenty 'twenty four is more encouraging.
Stephen D. Kelley: In the second quarter, we expect revenue to rebound sequentially.
Stephen D. Kelley: Driven mostly by strength in the data center computing market.
Stephen D. Kelley: We also expect to grow in the second half of the year.
Stephen D. Kelley: Semiconductor revenue gradually improves.
Stephen D. Kelley: The industrial medical market begins to normalize.
Stephen D. Kelley: In the data center computing market continues to strengthen.
Stephen D. Kelley: Although we are carefully controlling spending we continue to invest in R&D.
Stephen D. Kelley: We are moving full speed ahead, bringing new products and technologies to our customers. Our Design-Win Pipeline has never been stronger, and we expect to make meaningful share gains as market conditions improve. On the manufacturing front, we are executing our consolidation plan, taking advantage of lower factory loading to speed product transfers and qualifications.
Stephen D. Kelley: We're moving full speed ahead bring.
Stephen D. Kelley: Bringing new products and technologies to our customers.
Stephen D. Kelley: Our design win pipeline has never been stronger.
Stephen D. Kelley: And we expect to make meaningful share gains as market conditions improve.
Stephen D. Kelley: On the manufacturing front, we are executing our consolidation plan.
Stephen D. Kelley: Taking advantage of lower factory loading to speed product transfers and qualifications.
Stephen D. Kelley: We expect these efforts to benefit gross margin beginning in the second half of 2024.
Stephen D. Kelley: As lower manufacturing costs start to flow through our P&L.
Stephen D. Kelley: We expect these efforts to benefit gross margin beginning in the second half of 2024, as lower manufacturing costs start to flow through our P&L. We are operating in a dynamic environment this year. So we need to remain nimble, able to respond quickly to upside demand. To do that, we are maintaining strategic piece parts inventory, as well as appropriate factory staffing levels. In addition... We plan to build some finished goods inventory to take advantage of open manufacturing capacity. Now, I'll provide some color on each of our markets.
Stephen D. Kelley: We are operating in a dynamic environment this year.
Stephen D. Kelley: So we need to remain nimble.
Stephen D. Kelley: Able to respond quickly to upside demand.
Stephen D. Kelley: To do that.
Stephen D. Kelley: We are maintaining strategic piece parts inventory.
Stephen D. Kelley: As well as appropriate factory staffing levels.
Stephen D. Kelley: In addition.
Stephen D. Kelley: We plan to build some finished goods inventory to take advantage of opened manufacturing capacity.
Stephen D. Kelley: Now I'll provide some color on each of our markets.
Stephen D. Kelley: First quarter semiconductor revenue was slightly better than expected. Help Bank Growth and Valuated Services, on the design wind front. I am pleased to report that we have secured our first major wins, for both the EVOS and Everest Next Generation Plasma Power Products. Over the course of this year, we expect to announce more major design wins, which we believe will drive share gains in the coming years. We have already shipped more than 50 EVOs and Everest systems, and customers have requested that we ship another 150 systems before year-end.
Stephen D. Kelley: First quarter semiconductor revenue was slightly better than expected.
Stephen D. Kelley: Helped by growth in value added services.
Stephen D. Kelley: On the design win front.
Stephen D. Kelley: I'm pleased to report that we have secured our first major wins for both the <unk> and Everest next generation plasma power products.
Stephen D. Kelley: Over the course of this year, we expect to announce more major design wins, which we believe will drive share gains in the coming years.
Stephen D. Kelley: We have already shipped more than 50, Evo <unk> and EVAR systems.
Stephen D. Kelley: And customers have requested that we shipped another 150 systems before year end.
Stephen D. Kelley: We are putting a lot of effort into keeping up with the extraordinary level of demand for these new technologies, which enable our customers to operate much more efficiently at leading-edge nodes. The modular architecture of Everest has dramatically shortened the development cycle time for derivative products. Our engineering teams have become more productive, enabling our customers to accelerate the introduction of next-generation etch and deposition systems. For both EVOS and Everest, we took a modular approach, leveraging our broad portfolio of high voltage, low power, RF, and Advanced Control Technologies to bring best-in-class solutions to our customers.
Stephen D. Kelley: We are putting a lot of effort into keeping up with the extraordinary level of demand for these new technologies, which enable our customers to operate much more efficiently at leading edge nodes.
Stephen D. Kelley: The modular architecture of Everest has dramatically shortened the development cycle time for derivative products.
Stephen D. Kelley: Our engineering teams have become more productive.
Stephen D. Kelley: Enabling our customers to accelerate the introduction of next generation etch and deposition systems.
Stephen D. Kelley: For both <unk> and Everest, we took a modular approach.
Stephen D. Kelley: Leveraging our broad portfolio of high voltage low power.
R F.
Stephen D. Kelley: And advanced control technologies to bring best in class solutions to our customers.
Stephen D. Kelley: Advanced Energy Development Teams from around the world work closely together to make these products a reality. Moving to industrial medical, where first quarter revenue was impacted by inventory correction, design activity in industrial and medical is extremely robust.
Stephen D. Kelley: Advanced energy development teams from around the World we're closely together.
Stephen D. Kelley: To make these products a reality.
Stephen D. Kelley: Moving to industrial medical where first quarter revenue was impacted by inventory corrections.
Stephen D. Kelley: Design activity in industrial and medical is extremely robust.
Stephen D. Kelley: After three years of dealing with supply chain shortages, our customers are now squarely focused on product innovation and differentiation, and design wins have been broad-based, including major first quarter wins in medical imaging, electrosurgery, and Warehouse Automation. In March, we launched our evergreen, high-power platform, which features best-in-class efficiency and power density. Target applications include aerospace and defense.
Stephen D. Kelley: After three years of dealing with supply chain shortages, our customers are now squarely focused on product innovation and differentiation.
Stephen D. Kelley: Design wins have been broad based.
Stephen D. Kelley: Including major first quarter wins in medical imaging.
Stephen D. Kelley: Electrosurgery.
Stephen D. Kelley: And warehouse automation.
Stephen D. Kelley: In March we launched our evergreen high power platform.
Stephen D. Kelley: Which features best in class efficiency and power density.
Stephen D. Kelley: Target applications include aerospace and defense.
Stephen D. Kelley: Fast Charging Stations, Industrial Lasers, and Large Capital Equipment. Our new industrial medical products are supported by focused sales teams and our new digital platform, which now includes e-commerce capability. In addition... Our quick turn engineering team works closely with customers to modify and customize our standard products to meet specific application needs. Moving on to data center computing, where first quarter revenue was slightly below expectation due to the push out of a single hyperscale program into the later quarters of the year, we are forecasting a significant rebound in second quarter revenue, given by increased hyperscale AI investments and our share gains in enterprise AI services. Telecom and networking revenue decreased sequentially. Reduced Infrastructure Investment and High Inventory Levels Constrained Revenue.
Stephen D. Kelley: Fast charging stations.
Stephen D. Kelley: Industrial lasers, and large capital equipment.
Stephen D. Kelley: Our new industrial medical products are supported by focused sales teams and our new digital platform.
Stephen D. Kelley: Which now includes e-commerce capability.
Stephen D. Kelley: In addition.
Stephen D. Kelley: Our quick turn engineering team works closely with customers to modify and customize our standard products to meet specific application needs.
Stephen D. Kelley: Moving on to data Center computing.
Where first quarter revenue was slightly below expectations.
Stephen D. Kelley: Due to the push out of a single Hyperscale program into the later quarters of the year.
We are forecasting a significant rebound in second quarter revenue.
Stephen D. Kelley: Driven by increased Hyperscale AI investments.
Stephen D. Kelley: And there are share gains in enterprise AI servers.
Yeah.
Stephen D. Kelley: Telecom and networking revenue decreased sequentially.
Stephen D. Kelley: Reduced infrastructure investment and high inventory levels constrained revenue.
Stephen D. Kelley: We expect these challenging market conditions to persist throughout 2024. Now, let me summarize our outline. We expect the first quarter to be our revenue trough for the year. In the second quarter, we expect that the surge in data center computing demand will drive sequential revenue growth. As we move into the second half, our outlook remains largely unchanged from our last earnings class.
Stephen D. Kelley: We expect these challenging market conditions to persist.
Stephen D. Kelley: Throughout 'twenty 'twenty four.
Okay.
Speaker Change: Now, let me summarize our outlook.
Speaker Change: We expect the first quarter to be our revenue trough for the year.
Speaker Change: In the second quarter, we expected a surge in data center computing demand will drive sequential revenue growth.
Speaker Change: As we move into the second half our outlook remains largely unchanged from our last earnings call.
Stephen D. Kelley: This is based on our expectation that conditions in the semiconductor, industrial, and medical markets will gradually improve, driving sequential quarterly growth. Customers are embracing our new technologies and products in design, and activity is at an all-time high. We expect that these design wins will drive market share gains in our target market. Our manufacturing consolidation plan is on track, giving us confidence in our ability to move gross margins above 40% as markets recover.
Speaker Change: This is based on our expectation that conditions in the semiconductor industrial and medical markets will gradually improve.
Speaker Change: Driving sequential quarterly growth.
Speaker Change: Customers are embracing our new technologies and products.
Speaker Change: In designing activity is at an all time high.
We expect that these design wins will drive market share gains in our target markets.
Speaker Change: Our manufacturing consolidation plan is on track, giving us confidence in our ability to move gross margins above 40%.
As markets recover.
Stephen D. Kelley: Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities, which makes strategic and Financial Center. Looking forward, we believe that the investments we are making in R&D and manufacturing, coupled with potential acquisitions, will accelerate our medium and long-term profitable growth. Paul will now provide more detailed financial information.
Finally with.
Speaker Change: With a strong balance sheet.
Speaker Change: We continue to look for inorganic growth opportunities.
Speaker Change: Which makes strategic and financial sense.
Looking forward.
Speaker Change: We believe that the investments, we're making in R&D and manufacturing.
Speaker Change: Coupled with potential acquisitions.
We will accelerate our medium and long term profitable growth.
Speaker Change: Paul will now provide more detailed financial information.
Paul R. Oldham: Thank you, Steve, and good afternoon, everyone. First quarter revenue declined 19% quarter over quarter, driven by a challenging demand environment in our non-semi-market economy. Despite the lower volumes, a healthy product mix and solid execution allowed us to meet our gross margin target, and steps we took to control our operating expenses enabled us to deliver earnings per share of 58 cents, which was within our guidance. The market environment in the first quarter was characterized by higher than expected customer inventory de-stocking and reduced demand at telecom and networking customers.
Paul R. Oldham: Thank you, Steve and good afternoon, everyone.
Paul R. Oldham: First quarter revenue declined 19% quarter over quarter, driven by a challenging demand environment in our non semi markets.
Paul R. Oldham: Despite the lower volumes healthy product mix and solid execution allowed us to meet our gross margin target.
Paul R. Oldham: And steps, we took to control our operating expenses enabled us to deliver earnings per share of 58 cents, which was within our guidance.
Paul R. Oldham: The market environment in the first quarter was characterized by higher than expected customer inventory destocking and reduced demand at telecom and networking customers.
Paul R. Oldham: Semiconductor revenue in Q1 was ahead of our expectations, and backlog declined modestly from the end of last year and was in line with our target of slightly more than a quarter of revenue. At the same time, this was the second consecutive quarter of higher bookings, which supports our Q2 outlook for a sequential revenue rebound. Based on some early signs of improvement, we believe our Q1 revenue will be the trough, and we expect business levels to increase over the remainder of the year. Now, let's review our financial results in more detail.
Paul R. Oldham: Semiconductor revenue in Q1 was ahead of our expectations.
Backlog declined modestly from the end of last year and was in line with our target of slightly more than a quarter of revenue.
Paul R. Oldham: At the same time this was the second consecutive quarter of higher bookings, which supports our Q2 outlook for a sequential revenue rebound.
Paul R. Oldham: Based on some early signs of improvement we believe our Q1 revenue will be the trough in.
Paul R. Oldham: And we expect business levels to increase over the remainder of the year.
Paul R. Oldham: Revenue in the semiconductor market was $180 million, down 6% sequentially and 7% year-over-year. However, results were slightly better than our guidance, with sequential growth in services. We continue to expect Q2 revenues around this level, with the second half stronger than the first half. Revenue in the industrial and medical market was $83 million, down 23% from last quarter and 32% from last year. The impact of shorter lead times and increased inventory throughout the channel resulted in higher than expected levels of inventory rebalancing at both our OEMs and distributors.
Paul R. Oldham: Now, let's review our financial results in more detail.
Paul R. Oldham: Revenue in the semiconductor market was $180 million down, 6% sequentially and 7% year over year.
Paul R. Oldham: Results were slightly better than our guidance with sequential growth in services.
Paul R. Oldham: We continue to expect Q2 revenues around this level, but the second half stronger than the first half.
Paul R. Oldham: Revenue in the industrial and medical market was $83 million down 23% from last quarter and 32% from last year.
Paul R. Oldham: The impact of shorter lead times and increased inventory throughout the channel resulted in higher than expected levels of inventory rebalancing at both our Oems and distributors.
Paul R. Oldham: We expect revenues to remain around this level until inventories begin to normalize in the second half. Data center computing revenue is $42 million, down 33% sequentially and 30% year over year. Although we had expected lower revenue this quarter, we also saw a single hyperscale program push out into the remainder of the year. However, based on recent order rates, driven by increased investments in AI across multiple programs, we expect revenues to meaningfully rebound starting in the second quarter.
Paul R. Oldham: We expect revenues to remain around this level until inventories began to normalize in the second half.
Paul R. Oldham: Data Center computing revenue was $42 million down, 33% sequentially and 30% year over year.
Paul R. Oldham: Although we had expected lower revenue this quarter. We also saw a single Hyperscale program push out into the remainder of the year.
Paul R. Oldham: However, based on recent order rates driven by increased investments in AI across multiple programs, we expect revenues to meaningfully rebound starting in the second quarter.
Paul R. Oldham: Telecom and networking revenue declined 48% sequentially and over 50% year-over-year to $22 million, following a very strong 2023 in which customers replenished inventories following the supply chain crisis. However, demand in Q1 was even lower than our expectations due to further weakening in both the telecom and networking markets. Increasing the Impact of Inventory Destruction
Telecom and networking revenue declined 48% sequentially and over 50% year over year to $22 million. Following a very strong 20, twenty-three and which customers replenished inventories following the supply chain crisis.
Paul R. Oldham: However, demand in Q1 was even lower than our expectations due to further weakening in both the telecom and networking markets, increasing the impact of inventory destocking.
Paul R. Oldham: We expect these market conditions to persist through the end of the year. First quarter gross margin was 35.1%, down 60 basis points from last quarter and 170 basis points from last year. Results were in line with our expectations, despite the lower volume, due to favorable product mix and actions we are taking to lower cost. We expect Q2 gross margins to be at a similar level on higher volumes, but less favorable mix.
Paul R. Oldham: We expect these market conditions to persist through the end of the year.
Paul R. Oldham: First quarter gross margin was 35, 1% down 60 basis points from last quarter, and 170 basis points from last year.
Paul R. Oldham: Results were in line with our expectations. Despite the lower volume due to favorable product mix and actions, we are taking to lower cost.
Paul R. Oldham: We expect Q2 gross margins to be at a similar level on higher volumes, but less favorable mix.
Paul R. Oldham: In the second half, we continue to expect gross margins to increase driven by our ongoing manufacturing consolidation activities, higher volumes, and reduced material costs. Operating expenses were $93.5 million, down from last quarter and below our target.
Paul R. Oldham: In the second half we continue to expect gross margins to increase driven by our ongoing manufacturing consolidation activities.
Paul R. Oldham: Higher volumes and reduced material costs.
Paul R. Oldham: Operating expenses were $93 $5 million down from last quarter and below our target.
Paul R. Oldham: Q1 was the fifth consecutive quarter that we reduced operating spending, which is down more than 7% from Q4 of 2022 despite the inflationary environment. We will continue to focus on controlling our discretionary spending while investing to support new product and platform activities throughout the year. Operating income was $21 million for the quarter. Depreciation was $10 million, and our adjusted EBITDA was $31 million.
Paul R. Oldham: Q1 was the fifth consecutive quarter that we reduced operating spending which is down more than 7% from Q4 of 2022 despite the inflationary environment.
Paul R. Oldham: We will continue to focus on controlling our discretionary spending while investing to support new product and platform activities throughout the year.
Paul R. Oldham: Operating income was $21 million for the quarter.
Paul R. Oldham: Depreciation was $10 million and our adjusted EBITDA was $31 million.
Paul R. Oldham: Other income was $5 million, at the high end of our guidance, with interest income higher than interest expense, consistent with Q4. We expect other income to remain around $5 million per quarter until the swap instrument against our outstanding term loan expires in September of this year. For Q1, our non-GAAP tax rate was 17.7%, higher than our target of 16% due to timing and the geographic mix of profits. We expect the tax rate to remain in the 17-18% range for the balance of the year.
Paul R. Oldham: Other income was $5 million at the high end of our guidance with interest income higher than interest expense consistent with Q4.
Paul R. Oldham: We expect other income to remain around $5 million per quarter until the swap instrument against our outstanding term loan expires in September of this year.
Paul R. Oldham: For Q1, our non-GAAP tax rate was 17.7% higher than our target of 16% due to timing and geographic mix of profits.
Paul R. Oldham: We expect the tax rate to remain in the 17% to 18% range for the balance of the year.
Paul R. Oldham: First quarter EPS was $0.58 per share compared to $1.24 in both the previous and year-ago quarters. Turning now to the balance sheet, total cash and investments at the end of the first quarter were $1.02 billion, with net cash of $106 million.
Paul R. Oldham: First quarter EPS was <unk> 58 cents per share compared to $1 24 in both the previous and year ago quarters.
Paul R. Oldham: Turning now to the balance sheet.
Paul R. Oldham: Total cash and investments at the end of the first quarter was $1.02 billion with net cash of $106 million.
Paul R. Oldham: Cash flow from continuing operations was $8 million. Timing of previous year incentive payments, higher inventory on strategic investments, and lower revenue impacted our cash flow. Overall, inventory increased $25 million, or 7.5% sequentially, resulting in inventory days of 153 in Q1. DPO increased from 49 days in Q4 to 58 days in Q1. Receivables declined by $35 million on lower revenue, and DSO was up slightly to 68 days.
Paul R. Oldham: Cash flow from continuing operations was $8 million.
Paul R. Oldham: Timing of previous year incentive payments higher inventory on strategic investments and lower revenue impacted our cash flow.
Paul R. Oldham: Overall inventory increased $25 million or seven 5% sequentially, resulting in inventory days of 153 in Q1.
Paul R. Oldham: D. P O increased from 49 days in Q4 to 58 days in Q1.
Paul R. Oldham: Receivables declined by $35 million on lower revenue and DSO was up slightly to 68 days.
Paul R. Oldham: During the first quarter, we invested $16.6 million in CapEx. We continue to expect that 2024 CAPEX will be approximately 4% of sales. We also made debt principal payments of $5 million, and paid $3.8 million in dividends.
Paul R. Oldham: During the first quarter, we invested $16 $6 million in Capex.
Paul R. Oldham: We continue to expect that 'twenty 'twenty, four capex will be approximately 4% of sales.
Paul R. Oldham: We also made debt principal payments of $5 million and paid $3.8 million in dividends.
Paul R. Oldham: Turning now to our guidance, we expect second quarter revenue to rebound from a Q1 trough, driven primarily by a recovery in data center computing. We expect semiconductor revenues to be at similar levels to the first quarter, and we expect industrial and medical and telecom and networking markets to be approximately flat as customers continue to rebalance their inventory. As a result, we are forecasting our second quarter revenue to be approximately $350 million, plus or minus $20 million.
Speaker Change: Turning now to our guidance.
Speaker Change: We expect second quarter revenue to rebound from a Q1 trough driven primarily by a recovery in data center computing.
Speaker Change: We expect semiconductor revenues to be at similar levels to the first quarter, and we expect industrial and medical and telecom and networking markets to be approximately flat as customers continue to rebalance their inventories.
Speaker Change: As a result, we are forecasting our second quarter revenue to be approximately $350 million plus or minus $20 million.
Paul R. Oldham: We expect gross margin in Q2 to remain at or around Q1 levels on higher volumes and improved costs offset by a less favorable mix. We expect Q2 operating expenses to increase one to two million dollars sequentially due primarily to increased R&D investments to support new product launches and investments to scale the company. As a result, we expect Q2 non-gap earnings per share to be $0.73, plus or minus $0.25. Before opening it up for Q&A, I want to highlight a few important points.
Speaker Change: We expect gross margin in Q2 to remain at around Q1 levels on higher volumes and improved costs offset by less favorable mix.
Speaker Change: We expect Q2 operating expenses to increase $1 million to $2 million sequentially due primarily to increased R&D investments to support new product launches and investments to scale the company.
Speaker Change: As a result, we expect Q2 non-GAAP earnings per share to be 73 cents, plus or minus 25 cents.
Speaker Change: Before opening it up for Q&A I want to highlight a few important points.
Paul R. Oldham: Overall, we continue to invest and set priorities with a long-term view of the market, while managing prudently given near-term dynamics. Despite the lower results in Q1, we expect revenues to improve sequentially in Q2. In addition, we expect the second half to grow largely as we had previously projected, driven by incremental revenue across several programs and the timing of market improvements. Looking beyond this year, we believe we are focused on the right market, with strong customer pull for our highly differentiated products and technology.
Speaker Change: Overall, we continue to invest and set priorities with our long term view of the market.
Speaker Change: While managing prudently given near term dynamics.
Speaker Change: Despite the lower results in Q1, we expect revenues to improve sequentially in Q2.
Speaker Change: In addition, we expect the second half to grow largely as we had previously projected.
Speaker Change: Driven by incremental revenue across several programs and timing of market improvement.
Looking beyond this year, we believe we are focused on the right markets with strong customer pull for our highly differentiated products and technologies.
Paul R. Oldham: As a result, we expect to deliver strong growth and market share gains as markets recover. Second, we believe earnings for the year will continue to be largely in line with our previous projections. We are executing our plan to improve gross margins and profitability. We continue to expect gross margins to expand in the second half of the year, reaching our target of 37.5% to 38% by the end of the year as revenue improves.
Speaker Change: As a result, we expect to deliver strong growth and market share gains as markets recover.
Speaker Change: Second we believe earnings for the year will continue to be largely in line with our previous projections.
Speaker Change: We are executing our plan to improve our gross margins and profitability.
Speaker Change: We continue to expect gross margins to expand in the second half of the year, reaching our target of 37.5% to 38% by the end of the year as revenue improves.
Speaker Change: In addition, we expect operating expenses to grow modestly over the next several quarters as we manage our cost structure, while investing in new products and scale to drive future growth.
Speaker Change: Beyond this year, we believe we are on track to achieve our gross margin goal of over 40% as quarterly revenue recovers to the mid $400 million range and to deliver higher earnings than our prior peak as markets recover.
Speaker Change: Finally, we have a strong balance sheet and are well positioned to execute acquisitions that make financial and strategic sense.
Paul R. Oldham: In addition, we expect operating expenses to grow modestly over the next several quarters as we manage our cost structure while investing in new products and scale to drive future growth. Beyond this year, we believe we are on track to achieve our gross margin goal of over 40% as quarterly revenue recovers to the mid $400 million range and to deliver higher earnings than our prior peak as markets recover. Finally, we have a strong balance sheet and are well-positioned to execute acquisitions that make financial and strategic sense. With that, we'll take your questions, Operator.
Speaker Change: With that we'll take your questions operator.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you'd like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key.
Speaker Change: Thank you we 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 is in the queue. You May press star two if you'd like to remove a question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Operator: One moment, please, while we poll for questions. And the first question comes from the line of Joe Quatrochi from Wells Fargo. Please proceed with your question.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: And the first question comes from the line of Joe <unk> from Wells Fargo. Please proceed with your question.
Joseph Michael Quatrochi: Yeah, thanks for taking the question. Maybe first, just kind of broadly speaking, you know, maybe ex-semiconductor, just trying to understand, it sounds like, you know, inventory destocking was a bit more than expected. So, can you talk about just, you know, your level of visibility forward and what gives you confidence that we're kind of reaching or finding an endpoint for some of the inventory destocking as we move through the year?
Yeah. Thanks for taking the question maybe first just kind of broadly speaking you know maybe ex semiconductor just trying to understand it sounds like inventory destocking.
Joe: It was a bit more than expected. So can you talk about just you know your level of visibility for and what gives you confidence that you know.
Joe: We're kind of reaching a S. R. Finding a an endpoint as some of the inventory destocking as we move through the year.
Stephen D. Kelley: Yeah, Joe, this is Steve. I'll make a few comments. You're right. In Q1, the de-stocking was a little bit more significant than we originally forecasted. There are two main areas of weakness. One is telecom and networking, and the second is industrial medical. Telecom and networking: basically, what happened was a lot of inventory built up at the end of the year, and then we think there's also a demand shift that we saw in Q1. And so we don't expect the telecom and networking market to come back this year. So,
Joe: Yeah, Joe This is Steve I'll make a few comments.
Stephen D. Kelley: Youre right in Q1, the Destocking was a little bit more significant than we originally forecasted.
Stephen D. Kelley: There are two main areas of weakness one.
Stephen D. Kelley: It was telecom and networking and the second was industrial medical.
Stephen D. Kelley: Telecom and networking basically what happened was a lot of inventory built up at the end of the year and then we think there's also a demand shift that we saw in Q1 and so we don't expect the telecom and networking market to come back this year.
Stephen D. Kelley: So.
Stephen D. Kelley: The real focus for us is on industrial medical. And with industrial medical, it's a little bit more difficult because they're a lot more. You know, Telecom and Networking are just a few big customers, and Industrial Medical is many customers. What makes TechGroup...
Stephen D. Kelley: The real focus for us as an industrial medical.
Stephen D. Kelley: And with industrial medical it's a little bit more difficult because there are a lot more customers you know telecom and networking as a just a few big customers until and industrial medical as many customers.
Stephen D. Kelley: What makes that group.
Stephen D. Kelley: Somewhat unique is that they suffered the most over the last three years during the supply chain issues, so they recovered late. Probably most people recovered from supply chain issues late 23, early 24. And so what those customers encountered over the past three years were very long lead times and a mentality shift from Just in Time to Just in Case procurement. And then, all of a sudden, you saw a subtle lead time contraction in the first quarter of this year.
Stephen D. Kelley: Somewhat unique is that they suffered the most you know over the last three years during the supply chain issues.
So they they recovered late.
Stephen D. Kelley: Probably our most people recovered from supply chain issues late 'twenty three early 'twenty four.
Stephen D. Kelley: And so what those customers encountered over the past three years were very long lead times a shift and.
Stephen D. Kelley: In mentality from just in time to just in case procurement.
Stephen D. Kelley: And then all of a sudden you saw subtle lead time contraction in the first quarter of this year and.
Stephen D. Kelley: And so that's really what caused these pockets of inventory. You know, some of those are in distribution, but many of those are at the end customer, and sometimes at their customer. And so that's why it's more difficult to track, you know, the exact level of inventory in industrial medical.
Stephen D. Kelley: So that's really what caused these pockets of inventory you know.
Stephen D. Kelley: Some of those are in distribution, but many of those are.
Stephen D. Kelley: At the end customer and sometimes at their customers.
Stephen D. Kelley: And so that's why it's more difficult to track the.
Stephen D. Kelley: The exact level of inventory and industrial medical.
Stephen D. Kelley: The good news is we're starting to see a recovery on the medical side, and we're seeing some encouraging signs of a movement to Q2 and Q3 on medical and industrial based on our discussions with customers and distributors, and also analyzing trends in resales as well as orders from direct customers. We think that's going to start to normalize in either Q3 or Q4 this year. As we look back, you know, we saw the correction start in Q4 of 23. And so we're in the third quarter of that correction today. That's why we think we'll be out of this by sometime in Q3 or Q4 of this year.
Stephen D. Kelley: The good news is we've already seen recovery are we starting to see a recovery on the medical side.
Stephen D. Kelley: And we're seeing some encouraging signs as we move into Q2 and Q3 of medical.
Stephen D. Kelley: Industrial.
Stephen D. Kelley: Based on our discussions with customers with distributors.
Stephen D. Kelley: And also analyzing.
Stephen D. Kelley: Trends in our resale as well as orders from from direct customers. We think that's going to start to normalize.
Stephen D. Kelley: In either Q3 or Q4 this year.
Stephen D. Kelley:
Stephen D. Kelley: As we look back we saw the correction start in Q4 in industrial medical Q4, 'twenty three and so were in the third quarter that correction today.
Stephen D. Kelley: That's why we think we'll be out of this sometime in Q3 or Q4 of this year.
Joseph Michael Quatrochi: Got it, that's a helpful color. And as a follow-up, you guys are talking obviously about data-centered computing, increasing sequentially driving, you know, revenue growth there. And you mentioned the rebound on hyperscale AI investments. Can you talk about what's driving that? Because obviously, you know, investment in AI servers has been strong for several quarters, and maybe you guys haven't quite participated in that as much as others in the market.
Speaker Change: Got it that's helpful color and as a follow up you know you guys are talking obviously data center computing are increasing sequentially driving the revenue growth there and you mentioned you know rebound on Hyperscale AI investments.
Speaker Change: Can you talk about what's driving that because obviously your investment in an AI servers, you know has.
Speaker Change: Has been strong for several quarters.
Speaker Change: And maybe you guys havent quite as participated in as much as others in the market. So what what's changing is it market share gains is it your customer specific customers that are spending more just something or related to other component availability that pulls you Ann can you just talk about that.
Joseph Michael Quatrochi: So what's changing? Is it market share gains? Is it your customers, specific customers that are spending more, something related to, you know, other component availability that pulls you in? Can you just talk about that? Yeah, yeah, I'd be happy to.
Stephen D. Kelley: Yeah, yeah, I'd be happy to. You know, we think what happened was our customers first had to focus on bricks-and-mortar. You know, they had to build a data center infrastructure. Then they had to secure the modules, primarily with NVIDIA chips in them.
Speaker Change: Yeah, Yeah, I'd be happy to.
Ann: You know, we we think what happened was.
Ann: Our customers first had to focus on brick and mortar now they had to build a data center infrastructure.
Ann: Then they had to secure the the modules.
Ann: Primarily with Nvidia.
Ann: Chips in them and then they can go after power supplies and other things they need to complete the data centers. So I think I think we're we're okay with regards to our market share in the in the datacenter in fact.
Stephen D. Kelley: And then they can go after power supplies and other things they need to complete the data centers. So I think we're okay, you know, with regard to our market share in the data center. You know, we're actually selling and differentiating based on reliability, efficiency, and power density, and those three factors become much more important with artificial intelligence servers. Reliability is extremely important because these servers are very costly compared to conventional servers. The Efficiency and Power Density Metrics are very important because these AI racks consume three to five times the power of conventional racks.
Ann: We're actually selling and differentiating based on reliability and.
Ann: Efficiency and power density.
Ann: And those three factors become a much more important with artificial.
Ann: <unk> intelligence servers.
Ann: Reliability is extremely important because these servers are very.
Ann: Costly compared to conventional servers.
Ann: The efficiency and power density metrics.
Ann: A very important because these are AI racks consume three to five times the power of conventional rack. So we think we're in a good position there.
Stephen D. Kelley: So we think we're in a good position. The other thing that's helping us is our execution. We've been able to meet some near-term requirements from our customers. We think that provides some differentiation in addition to our technical attributes.
Speaker Change: The other thing that's helping us is our execution.
Speaker Change: So we've been able to to execute on some some near term requirements from our customers.
Speaker Change: And we think that's provided some differentiation in addition to our technical attributes.
Robert Stephen Barger: And the next question comes from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your question.
Speaker Change: And the next question comes from the line of Steve Barger with Keybanc capital markets. Please proceed with your question.
Robert Stephen Barger: Thanks. With the comment about design activity being at an all-time high, are you measuring that by starts or by dollar amount of activity or some other metric? And can you quantify where design is on a year-over-year basis?
Speaker Change: Thanks.
Robert Stephen Barger: Well the comment about design activity being at an all time high are you measuring that by starts or by dollar amount of activity or some other metric and can you quantify where design is and is on a year over year basis.
Stephen D. Kelley: Yes, Steve, I'd be happy to give you some... Figures of Merit. When we look at 2023, our design win funnel, the dollar value in the funnel increased 50% just for the industrial medical part of our business. As I look at our semiconductor part of the business, our metrics are more focused on major design wins. And I talked in the opening about the progress we're making with our EVOS and Everest platforms. The fact that we've shipped 50 of those platforms already and have demand for another 150 of those platforms before the end of this year is very significant.
Robert Stephen Barger: Yes, I'd be happy to give you some.
Speaker Change: Figures of Merit.
Speaker Change: When we look at 2023, our design win funnel the dollar value in the funnel increased 50% just for the industrial medical are part of our business.
Speaker Change:
Speaker Change: As I look to our semiconductor part of the business.
Speaker Change: Our metrics.
Speaker Change: Our more focused on major design wins and I talked in the opening about the progress, we're making with our IBO and Everest platforms. The fact that we've shipped 50 of those platforms already and have demand for another hundred 50 of those platforms before the end of this year is very significant.
Stephen D. Kelley: It means that our customers have looked at the initial units that we ship to them, and they want more. And so what we're seeing is that these units are going into not just our customers' laboratories but also into end-user wafer fabs. And so there's a race right now to be included as the process or the tool of record for the next super node, which is 2 nanometers, and also to be included in the most advanced memory processes, whether it's DRAM or NAND. So I think we're in really good shape there, and we'll see that market share increase in semiconductor based on our major design wins that we're currently working on this year.
Speaker Change: It means that.
Speaker Change: Our customers have looked at the initial units that we shipped to them and they want more.
Speaker Change: So what we're seeing is that these units are going into not just our customers laboratories, but also into our end to end user wafer fabs.
Speaker Change: And so there's there's a race right now to be included.
Speaker Change: As the process or the tool of record for.
Speaker Change: For the next Super node, which is two nanometer.
Speaker Change: It also to be included in their most advanced memory prices, whether its DRAM or NAND.
So I think we're really good shape, there and we'll see that market share.
The increase in semiconductor based on our our major design wins that were currently working on this year.
Robert Stephen Barger: Yeah, that is super encouraging. Are you ready for high-volume manufacturing for EVOS and Everson? If it comes to that.
Speaker Change: Yes that is super encouraging are you ready for high volume manufacturing for <unk>.
Stephen D. Kelley: Yeah, that's a great question. We will have two manufacturing sites for EVOS and Everest. The one we have today is in Malaysia, in Penang. And we're also in the process of building the second factory in Thailand. I mentioned that in previous calls. That'll come online in the third quarter of next year.
Speaker Change: If it came to that yes, it's a great question. So so.
Speaker Change: We will have two manufacturing sites for Evo some everest. The one we have today is in Malaysia in Penang.
Speaker Change: And we're also in the process of building a second factory in Thailand, I mentioned that in previous calls that will come online in the third quarter of next year and.
Stephen D. Kelley: You know, the first products we're introducing there will be plasma power products. They'll be EVOS, Everest, and some of our high-running products. So I think we're in good shape, you know. We have two very solid manufacturing sites for EVOs and Everest, and I think the ramp could be more pronounced than normal, given the strong demand we've seen this year.
Speaker Change: The first products for introducing there will be plasma power products there'll be evo Everest and some of our high running products.
Speaker Change: So I think we're in good shape web two very solid manufacturing sites for evoke and Everest.
Speaker Change: And I think the ramp could be more pronounced in the normal.
Speaker Change: Given the strong demand we've seen this year.
Robert Stephen Barger: Got it. And then for my follow-up, or maybe really my second follow-up, I know it's hard to model a trough, and I don't want to parse your words too closely, but when you predict a 2Q revenue rebound, I notice the low end of the guide is not far from 1Q, which I would just call more flat. Can you talk about confidence in the rebound and whether you're leaning towards low, middle, or high based on what you can see today?
Speaker Change: Got it and then for my follow up or maybe really my second follow up I know, it's hard to model a trough and I don't want to parse your words too closely but when you predicted <unk> revenue rebound I noticed the low end of the guide is not far from <unk>.
Speaker Change: Which I would just call it more flat can you talk about the confidence in the rebound and whether you're leaning towards low middle or high based on what you can see today.
Stephen D. Kelley: Well, I would say once burned, twice shy, so I think our guidance for Q2 is relatively conservative. You know, what we've seen basically on the data center side is a surge in orders. So we're basically working as hard as we can to fill those orders this quarter. So I think that's very secure. And for the rest of the business, we're basically modeling flat, which is pretty low to begin with.
Speaker Change: Well I would say once burned twice shy right. So.
Speaker Change: I think our her guidance for Q2's relatively conservative.
Robert Stephen Barger: understood. Thanks.
Speaker Change: What we've seen basically in the datacenter side as a surge in orders, so where we're basically working as hard as we can to fill those orders this quarter. So I think that's very secure.
Speaker Change: And for the rest of the business you know, we're basically modeling flat, which is pretty low to begin with.
Understood. Thanks sure.
Krish Sankar: And the next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.
Speaker Change: And the next question comes from the line of Krish Shankar with TD Cowen. Please proceed with your question.
Krish Sankar: Yeah, hi, thanks for taking my question. Steve, I had a question on your semi-revenues have been kind of bouncing around this $180 million, plus or minus $10-15 million range for like almost five quarters now. I understand you're going through, have gone through, a cyclical downturn, and your customers were destocking. The real question is, I'm just trying to wonder if we might get a cyclical rebound, but is really the true driver for semi-revenues going to come when NAND, the CapEx starts flowing through? Or do you think there are other vectors within that that can help you drive semi-revenues better than the kind of this range we've been...
Krish Sankar: Yeah, Hi, Thanks for taking my question.
Krish Sankar: Steve I had a question on <unk>.
Krish Sankar: Semi revenues have been kind of bouncing around the 180 million plus or minus 10 to 15 million range for like almost like water now I understand youre going to run through a cyclical downturn and you know your customers are destocking.
Krish Sankar: The real question is I'm, just trying to wonder like you know I understand that cyclical rebound, but is really the.
Krish Sankar: To drive on for Sidney that means when it comes to the NAD.
Krish Sankar: Stop slow include how do you think there are other vectors within that again.
Krish Sankar: Help you drive semi revenue.
Krish Sankar: Rather than kind of just the range we've been in.
Stephen D. Kelley: Yeah, Krishna, you know, I think one of the bigger drivers over the past year has been trailing edge logic, right? I think that's been a big part of the TAM in semiconductor equipment. So we've been fortunate to be a part of that.
Speaker Change: Yeah, Chris I think.
Speaker Change: One of the bigger drivers over the past year has been trailing edge logic right I think that's been a big part of the the Tam in.
Speaker Change: In semiconductor equipment.
Speaker Change: So we've been fortunate to be a part of that.
Stephen D. Kelley: Obviously, NAND demand has been low for the last 18 months, and DRAM, we've also been suffering there. You know, I think what we see moving forward, Krish, is in the second half, we're expecting to see some mild recovery begin for DRAM manufacturing and also for leading-edge logic. And then we expect things to accelerate in 2025 as NAN comes back online. So that's, uh, that's our current outlook on the products we've been producing for years. Then we layer on top of that the demand for EVOS and Everest for leading-edge memory and logic processing. So we think 2025 is going to be a really good year for us.
Speaker Change: Obviously, the NAND demand has been low for the last 18 months.
Speaker Change: In DRAM, we have also been suffering there so.
Speaker Change: I think what we see moving forward Krish is it.
Speaker Change: In the second half we're expecting to see.
Krish: Some mild recovery.
Speaker Change: Begin for for DRAM manufacturing and also for leading edge logic.
Speaker Change: And then we expect things to accelerate 2025 as NAND comes it comes back online. So that's that's our current outlook.
Speaker Change: On on the products, we have been producing for years.
Speaker Change: And then we layer on top of that the demand for evoke Everest for leading edge memory and logic processes. So we think 'twenty 'twenty five is going to be a real good year for us.
Speaker Change: Got it.
Speaker Change: I'll follow up I had one more question for Paul after that when do you expect the lagging edge.
Krish Sankar: So I'll just make a follow-up, but after that, I had one more question for Paul: when do you expect to see a lagging edge? for me to rebound.
Speaker Change: <unk> to rebound.
Stephen D. Kelley: Okay, I'll go ahead and take that question. It's very difficult to say. I think the way we think about the lagging edge is that there's China and non-China lagging edges. And I think for non-China lagging edges, things have been in a trough for a while. It's difficult to predict when that's going to come back. So, you know, we're kind of in a wait-and-see mode. I think it's similar in China; Chinese demand, based on what we've seen from our customers, is still reasonably strong. And, you know, we'll have to see how that develops in the coming quarters.
Speaker Change: Okay. I'll go ahead and take that question.
Speaker Change: The it's very difficult to say I think the way we think about lagging edge is there is China and non China lagging edge.
Paul R. Oldham: And I think for non China lagging edge things had been in a trough for a while.
Speaker Change: And it's difficult to predict when that's going to come back.
Speaker Change: So we're kind of in a wait and see mode. I think is similar in China, the China demand based on what we've seen.
Speaker Change: From our customers is still reasonably strong.
Speaker Change: And you know, we'll have to see how that develops in the coming quarters.
Krish Sankar: Another quick follow-up for Paul. You know, kind of a similar question, you know, the gross margin has been stuck in this range of 35 plus or minus. You're talking about getting to, you know, 250, 300 basis points higher by exiting this year. In the past, you spoke about premium pricing that as a headwind is going to become a tailwind, but obviously, volume fell through. Is the gross margin rebound predominantly volume driven and manufacturing costs cutting down on the factory? Or did you ever see any of the premium pricing thing captured? And also, do you expect the calendar 24 exit rates for revenues to be $400 million?
Speaker Change: Got it got it and then a quick follow up for Paul.
Speaker Change: Oh, you know kind of similar question on the gross margin has been stuck in this range in the 35 plus or minus you're.
Paul R. Oldham: Youre talking about getting.
Paul R. Oldham: 250, 300 basis points had exiting this year.
Paul R. Oldham: Passing you spoke about premium pricing that is a headwind is going to become a tailwind, but obviously volumes fell through.
Paul R. Oldham: Is the gross margin rebound predominantly volume driven and manufacturing costs I think non factory.
Paul R. Oldham: Did you ever see any of the premium pricing.
Speaker Change: Gotcha and also do you expect calendar 'twenty four.
Speaker Change: <unk> revenues to be $400 million a quarter.
Paul R. Oldham: Yes, so good questions. On gross margin, the first thing I'd say is we're pretty pleased that we were able to defend gross margins at 35% on down revenue. And I think that's a function of having a good mix, but we're also starting to see some of the benefit of some of our manufacturing cost actions. And we think that'll sort of be in the same range in Q2 as we see revenues come back to roughly $350 million.
Speaker Change: Yes, so good questions on the on the gross margin. The first thing I'd say is we're we're pretty pleased that we were able to defend gross margins at 35% on down revenue.
Speaker Change: And I think that's a function of we had we had good mix, but we're also starting to see some of the benefit of some of our manufacturing cost actions and we think that'll sort of be in the same range in Q2, as we see revenues come back until roughly the $350 million.
Speaker Change: And the mix kind of shifts back to where it was before.
Paul R. Oldham: And the mix kind of shifts back to where it was before. But as we look towards the end of the year, the big thing I think that's changing is first, we are starting to see the benefit of more of our manufacturing consolidation activity. You know, it's a transition.
Speaker Change: But as we look towards the end of the year the Big thing I think that's changing.
Speaker Change: Is is first we are starting to see the benefit of more of our manufacturing consolidation activity.
Paul R. Oldham: We're moving products from one site to another, which means we have to build up on, you know, the second site before we can take products out of the first site. And so we start to see the benefits of that really come in towards the latter part of this year. That's worth, I say on a general basis, 100 basis points of improvement. You're right, getting higher volume probably is another 100 basis points of that.
Speaker Change: It's a transition we're moving products from one site to another which means we have to build up on the second side before we can take products out of the first site.
Speaker Change: And so we start to see the benefits of that really come in towards the latter part of this year.
Speaker Change: That's worth just I say in a general basis.
Speaker Change: 100 basis points of the improvement.
Speaker Change: Youre right getting higher volume probably is another 100 basis points of that and our model. As we mentioned last quarter is is that that comes in at about $400 million of revenue. So we said, we we think we're on track to the same projections, we had last quarter, which means generally we see we see that $400 million within range by the end of the year.
Paul R. Oldham: And our model, as we mentioned last quarter, is that comes in at about $400 million in revenue. So we said we think we're on track to the same projections we had last quarter, which means, generally, we see that $400 million within range by the end of the year. The last piece is material costs.
Speaker Change: Are the last piece is the material costs and a lot of the benefit that we've seen has already come through as you recall.
Paul R. Oldham: And a lot of the benefit that we've seen has already come through. As you recall, you know, if you go back four or five quarters, that was running 300 basis points of bad news to gross margin. That's been trending down, is down into the 50 basis points or so, and we expect that to largely wash through in the next quarter. So I think the material cost in terms of the premiums is largely getting back into a normal range. We always have some fits and starts with the piece part here or there.
Speaker Change: If you go back four or five quarters that was running 300 basis points of bad news to gross margin. That's been trending down is down into the 50 basis points or so and we expect that to largely washed through in the next quarter. So I think the material cost in terms of the premiums is largely getting back into a normal range. We always have some.
Speaker Change: Fits and starts with the piece part here or there. So I think that's getting largely back to normal now it's coming down to our manufacturing cost improvements recovery in volumes and then over a longer period of time, our portfolio improvements or new products, Steve talked about the design wins, you're seeing both in industrial and medical and in semi with our Eva.
Paul R. Oldham: So I think that's getting largely back to normal. Now it's coming down to our manufacturing cost improvements, recovery in volumes, and then, over a longer period of time, you know, our portfolio improvements, our new products Steve's talked about, design wins we're seeing both in industrial and medical, and in SEMI with our EVOS and Everest. All those should contribute to better margins. I'll also make one other comment, and that is, as we see the data center market recovering, as Steve mentioned, that's driven by a lot of the AI investment that really demands the capabilities that we've been focused on.
Speaker Change: And Everest all those should contribute to better margins also make one other comment and that is as we see the data center market recovering as Steve mentioned, that's driven by a lot of the AI investment that really demands.
Paul R. Oldham: As you recall, we've had a more selective strategy there to focus on where customers value our differentiation and are willing to pay for that. So while margins in that part of the market, you know, aren't as strong as in others, they're much better than they used to be because of where we focused. And so I think that's also helping us as we go forward.
Speaker Change: The capabilities that we've been focused on as you recall, we've had at more selective.
Speaker Change: Selective strategy, there to focus where customers value our differentiation.
Speaker Change: And and are willing to pay for that so while margins in that part of the market arent as strong as the others, they're much better than they used to be because of where we focused and so I think that's also helping us as we go forward as well.
Krish Sankar: Thank you very much, Paul. That's very helpful. Thank you.
Speaker Change: Alright, Thank you everyone well that's very helpful. Thank you.
Speaker Change: You bet.
James Andrew Ricchiuti: And the next question comes from the line of James Ricchiuti with Needham and Company. Please proceed with your question.
Speaker Change: And the next question comes from the line of James Ricchiuti with Needham <unk> Company. Please proceed with your question.
James Andrew Ricchiuti: Hi, thanks. Good afternoon.
James Andrew Ricchiuti: Hi, Thanks, Good afternoon, Hey, Paul.
James Andrew Ricchiuti: We.
James Andrew Ricchiuti: Look out to the second half.
James Andrew Ricchiuti: See more of these markets beginning to recover.
James Andrew Ricchiuti: A question about Opex.
James Andrew Ricchiuti: Hey, Paul, as we look out to the second half, and I see more of these markets beginning to recover, a question about OPEX. What kind of OPEX will be required to support the higher revenues? Do you see a need? It sounds like you guys are increasing R&D spending, but just in general, as we think about OPEX and the markets recovering?
James Andrew Ricchiuti: What kind of Opex will be required.
James Andrew Ricchiuti: To support the higher revenues.
James Andrew Ricchiuti: You see a need it sounds like you guys are increasing.
James Andrew Ricchiuti: R&D spend but just in general as we think about Opex and the market's recovery.
Paul R. Oldham: Yeah, I think a good way to think about that, Jim, is that, you know, we got it to one to two million higher in Q2. I think based on volumes picking up, we'll see some, a little bit of variable costs continue to accelerate our efforts to get these new products qualified. So it's probably reasonable to think about a similar increase in each of the next couple of quarters. Now, I think that's lower than, you know, maybe we talked about earlier, because we've taken some near-term actions to help mitigate the growth of spending as we get all these new products and everything else out into the market. So that's probably the way to think about a similar increase in Q3 and Q4 relative to the guidance we gave in Q2.
Speaker Change: Yes, I think a good way to think about that Jim is that we guided to $1 million to $2 million higher in Q2, I think based as volumes pick up we'll see some a little bit of variable costs continue to accelerate our efforts on getting these new products qualified so its probably reasonable to think about a similar increase in each of the next couple.
James Andrew Ricchiuti: Quarters, now I think thats slower than maybe we talked about earlier, because we've taken some near term actions to help mitigate.
James Andrew Ricchiuti: The growth of spending as.
James Andrew Ricchiuti: As we get all these new products and everything else out into the market. So that's probably the way to think about a similar increase in Q3 and Q4 relative to kind of the guidance, we gave in Q <unk> and Q2.
James Andrew Ricchiuti: Got it. Hey, Steve, I wanted to go back to some of the commentary you provided on design wins in the Industrial Medical Markets. Can you talk a little bit about whether you may want to split the two, starting with medical first, or is the design win activity that you're seeing coming, I presume, mainly from existing customers?
Speaker Change: Got it Hey, Steve I wanted to go back to some of the commentary you provided on design wins.
Speaker Change: Industrial and medical markets.
Steve: Can you talk a little bit about.
Steve: Whether you may want to split the two.
Steve: Starting with medical first.
Steve: Design win activity that you're seeing coming I presume from mainly from existing customers is that fair to say.
James Andrew Ricchiuti: Is that fair to say?
Speaker Change: Yes, Jim ill start with medical and I think you are correct when.
Jim: When we purchased S how power.
Stephen D. Kelley: Yeah, Jim, I'll start with the medical. I think you're correct.
Jim: A couple of years ago, they had a set of medical customers that complemented our set of medical customers. So what we've been doing for the past two years as cross Pollinating.
Stephen D. Kelley: When we purchased SL Power... a couple of years ago, they had a set of medical customers that complemented our set of medical customers. So what we've been doing for the past two years is cross-pollinating, you know, the products between these two sets of customers. And you know, I think Medical has got a relatively well-defined set of big customers and then a lot of smaller, smaller outfits that go through distribution.
Jim: The products between these two sets of customers.
Speaker Change: And you know I think medical is.
Speaker Change: Got a relatively well defined set of big customers and then a lot of our smaller a smaller a physical distribution.
Stephen D. Kelley: So, yes, most of the big design wins are coming through established customers that either SL Power brought to Advanced Energy or Advanced Energy brought to SL Power. As I look at the industrial sector, yeah, yeah. But, so the industrial sector is a little bit different, right?
Speaker Change: Yes, most of the big design wins are coming through established customers. Neither S. O power brought to advanced energy or advanced energy protests willpower.
Speaker Change: As I look at industrial the industrial yeah, yeah. So so industrial is a little bit different right because it's a very very broad set of customers.
Stephen D. Kelley: Because it's a very, very broad set of customers, So, what we've done there, we've done, you know, a number of things differently over the past, let's say, year and a half. The first is we dedicated roughly half our sales force around the world to selling only industrial medical products to industrial medical customers. So this has really been a big factor behind the increase in the design wind funnel. The second is that we developed a new website, which makes it much easier for customers to specify, you know, the right products for advanced energy and to receive products very quickly from us.
Speaker Change: So what we've done there we've done a number of things differently over the past, let's say year year and a half. The first is we dedicated roughly half our sales force around the world to selling only industrial medical.
Speaker Change: Products to industrial medical customers. So this has really been a big factor behind the increase in the design win funnel.
Speaker Change: The second is we developed a new website.
Speaker Change: Which makes it a much easier for customers to specify the right products for advanced energy and to receive our products very quickly from us.
Stephen D. Kelley: So, you know, I think we're a much friendlier company to do business with if you're an industrial medical customer. The third thing we've done is we've increased the size of our... our quick turn engineering team. What this team does is takes our standard products, and based on customer request, they will customize or tailor those products to the specific application. And so we've seen roughly a 50% increase in those spinoffs from standard products.
Speaker Change: So I think we're we're much friendlier company to do business with if you're an industrial medical customer.
Speaker Change: The third thing we've done is we've increased the size of R.
Speaker Change: Our quick turn engineering team and what this team does is they take our standard products.
Speaker Change: And based on customer requests they will customize tailor those products to the specific application.
Speaker Change: And so we've seen roughly a 50% increase in those.
Speaker Change: Those are spinoffs from standard products and we could we could do those those custom products very quickly typically between four and eight weeks is the development time.
Stephen D. Kelley: And we can do those custom products very quickly; typically, between four and eight weeks is the development time. And so, all this activity is leading to, you know, a higher market share in industrial medical and a lot of optimism as we look forward to our ability to become a much more significant player in industrial medical.
Speaker Change: And so all this activities leading to you know.
Speaker Change: Higher market share in industrial medical and a lot of optimism as we look forward about our ability to become much more significant player in industrial medical.
James Andrew Ricchiuti: Got it. Helpful color. Last question, if I may, and this is a broad question, just on SEMI, but, you know, from where you sit today, would you say you're more or less optimistic about the improvement in the second half versus, say, three months ago?
Speaker Change: Got it helpful color and last question if I may and this is a broad question just on semi but yes.
Speaker Change: Sit today.
Speaker Change: Would you say you are.
Speaker Change: More or less optimistic about the improvement in the second half we're seeing safety if that's okay.
Stephen D. Kelley: I'd say it's about the same, you know, I think... The forecast that we have today supports, you know, a, you know, high single-digit percentage, perhaps 10% increase in revenue in semiconductors, you know, first half to second half. So, you know, I think that's about the same that we saw a quarter ago. So really, nothing has changed when it comes to the second half of this year. I think what's changed for us is really our view of next year, and that's based on our success with EVOS and Everest, our first design wins, and the intensity of activity we're seeing at our customers right now.
Speaker Change: I'd say, it's about the same.
Speaker Change: I think.
James Andrew Ricchiuti: Thanks very much.
Speaker Change: The forecast that we have today.
Speaker Change: Support you know a.
Speaker Change: High single digit percentage, perhaps 10% increase in revenue in semiconductor first half to second half.
Speaker Change:
Speaker Change: So I think that's about the same.
Speaker Change: We saw a quarter ago, so really nothing has changed.
Speaker Change: When it comes to the second half of this year.
Speaker Change: I think what's changed for us.
Speaker Change: It's really our view of next year and that's based on our success with Evo and Everest, Our first design wins and the the intensity of activity were seeing that our customers right now.
Speaker Change: Got it thanks very much.
Scott Graham: And the next question comes from the line of Scott Graham with Seaport Research. Please proceed with your question.
Speaker Change: And the next question comes from the line of Scott Graham with Seaport Research. Please proceed with your question.
Scott Graham: Hey, good afternoon. Thanks for taking my question. And, Steve, you sound better than you did a quarter ago. I know that the revenue print was a little hard, but, you know, the gross margin held up well, and you sound better about the outlook. I wanted to ask you a question about the data center business because, you know, I cover a number of companies, as others do, that have a lot of data center exposure.
Scott Graham: Hey, good afternoon, Thanks for taking my question and.
Scott Graham: Steve you sound better than you did a quarter ago I know that the revenue frankly, it's a little hard but you know the.
Scott Graham: The gross margin held up well and you sound better on the outlook.
Scott Graham: I wanted to ask you a question about the data center business because.
Scott Graham: I thought for a number of companies as others do that have a lot of data center exposure and.
Scott Graham: And, you know, not really seeing the decline that you guys have been seeing the last couple of quarters. In fact, in most cases, to the contrary. I know you kind of walked us through that. You kind of think that the power conversion equipment goes in, let's say, last. Would you color that, you know, the last couple of quarters of declines? In that way, was there perhaps some destocking involved there, or was it something else? Because you sound, obviously, and for all disorders' sake, much more optimistic about data centers going forward. I just want to try to understand what happened with that.
Scott Graham: We're not really seeing the declines that you guys have been seeing the last couple of quarters in fact in most cases to the contrary.
Scott Graham: I know you kind of walk us through that you know you kind of think that the power center.
Scott Graham: Aversion.
Scott Graham: Equipment goes in let's say last is it would you color that.
Scott Graham: The last couple of quarters of declines.
Scott Graham: Wei was there perhaps some.
Scott Graham: Destocking involved there.
Scott Graham: Or was it or was it something else because you sound obviously and for.
Scott Graham: August orders sake, much more optimistic about data centers going forward I, just want to try to understand what happened.
Stephen D. Kelley: Yeah, yeah, Scott. You know, I think part of it was just a sequential procurement strategy where you can't build these AI-enabled data centers without a commitment to chips and modules for the GPU and high-bandwidth memory. So I think once our customers were able to secure those allocations, right, then they were able to go to companies like Advanced Energy and purchase advanced power supplies. So I think that's part of it. I think, you know, the second part of it, as I look back over the last three or four quarters, is that, you know, first, this is a cyclical market.
Scott Graham: <unk>.
Speaker Change: Yes, yes got it.
Speaker Change: Part of it was just a sequential.
Speaker Change: Procurement strategy, where you cant build these these AI enabled and data centers without a commitment of chips and modules.
Speaker Change: For the GPU and the high bandwidth memory. So I think once our customers were able to secure those allocations right. Then they were able to come to companies like advanced energy and and purchase advanced power supplies.
Speaker Change: So I think that's part of it.
Speaker Change: I think second part of as I look back over the last three or four quarters is.
Speaker Change:
Speaker Change: This is a cyclical market if you look back over the last.
Stephen D. Kelley: If you look back over the last 10 years, you know, this is the way it goes. They tend to buy a lot, and then they go into an inventory digestion mode, and they come roaring back. You know, it's pretty much on schedule, so we would expect to see, you know, strong demand from data centers for the next four to five quarters based on the last two cycles we went through. I think the third factor is... These customers were also impacted by supply chain issues over the past few years, and I'm sure there were some inventory issues that they were dealing with as well.
Speaker Change: 10 years, you know that this is the way it goes they tend to buy a lot.
Speaker Change: And then they go into an inventory digestion mode and they come Roaring back and that's.
Speaker Change: No it's pretty much on schedule. So we would expect to see.
Speaker Change: Strong demand from our datacenter for the next four to five quarters based on the.
Speaker Change: The last two cycles, we went through.
Speaker Change: I think the third factor is.
Speaker Change: These customers were also impacted by the supply chain issues over the past few years and I'm sure. There were some inventory issues that they were dealing with as well.
Scott Graham: Fair enough. Thank you for that. Hey, I just wanted to maybe touch on, you know, the balance sheet, the liquidity there, you did the debt deal a couple quarters back, and is it essentially that, you know, industrial and medical are just sort of sluggish markets for you right now that you're not looking there, or, you know, what is the outlook for, you know, the announcement of the closing of a deal, or more this year? How does that And what's your optimism on the timing of closing?
Speaker Change: Fair enough. Thank you for that.
Speaker Change: I just wanted to maybe touch on.
Speaker Change: You know the balance sheet. The liquidity there you did that deal couple of quarters back in.
Speaker Change: Is it essentially that.
Speaker Change: The industrial and medical are just sort of sluggish markets for you right now that youre not looking there or.
Speaker Change: No.
Speaker Change: What is what is the outlook for the announcement.
Speaker Change: The closing of the deal or more this year, how does that pipe located what's your optimism on timing of closing.
Stephen D. Kelley: Yeah, so maybe I'll chime in here. You know, I think we're fortunate in that we generate cash as a company and that we had a successful convertible deal in September. So we had, you know, we're sitting on over a billion dollars in cash. That said, you know, we're not going to do a deal that doesn't make sense for the company. And so, you know, we're still looking for a deal that makes financial sense for the company, makes strategic sense for the company, that we can integrate quickly, and that increases our gross margin. So, you know, we're still working on it, and we'll see what develops in the coming months.
Speaker Change: Yeah, So maybe I'll chime in here.
Speaker Change: I think we're fortunate in that we we generate cash as a company and that we had a successful.
Speaker Change: <unk> deal in September. So we have you know we're sitting on over $1 billion in cash.
Speaker Change:
Speaker Change: That said you know, we're not going to do a deal that doesn't make sense for the company.
Speaker Change: And so we're still looking for a deal that makes financial sense for the company make strategic sense for the company.
Speaker Change: We can integrate quickly.
Speaker Change: And it averages up our gross margin.
Speaker Change: So we're still working on it.
Speaker Change: And you know, we'll see what develops in the coming months.
Scott Graham: I guess more to the point, my question is, is your deal pipeline a little thicker than it was six months ago, and is your optimism higher, or is that the weakness in those businesses maybe a bit of a
Speaker Change: I guess more to the point of my question is your deal pipeline.
Speaker Change: It'll thicker than it was.
Speaker Change: It was six months ago and is your optimism higher or is that weakness in those businesses maybe.
Speaker Change: Bit of a barrier.
Stephen D. Kelley: Well, you know, I think the deal pipeline may be slightly thicker. We've always had a good pipeline, and our practice has been to develop relationships with our potential target companies so that we're there, you know, first in line when they decide it's time to make a move. That said, you know, I think there's always going to be issues with valuation. And so, you know, I think that's really where most of these discussions end up. You have to figure out what's a fair value for both parties.
Speaker Change: Well I think the deal pipeline may be slightly thicker, we've always had a good pipeline and our practice has been to develop relationships with.
Speaker Change: With our potential target companies. So they were there.
Speaker Change: First in line when they decided it's time to make a make a move.
Speaker Change:
Speaker Change: That said I think there's always going to be issues on valuation.
Speaker Change: And so I think that's really where most of these discussions end up you have to figure out what's a fair value for both parties.
Scott Graham: All right, thank you.
Speaker Change: Alright, Thank you yep.
Operator: Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove any question from the queue. And for any participant using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our next question comes from the line of Mark Miller with Benchmark. Please proceed with your question.
Speaker Change: And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate that your line is in the queue. You May press star two to remove any question from the queue and for any participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our next question comes from the line of Mark Miller with Benchmark. Please proceed with your question.
Mark S. Miller: You indicated that the booking trends were positive during the quarter. I was just wondering if you could break that out a little more strongly. What were your strongest areas for booking?
Mark S. Miller: We haven't changed it that the booking trends were positive during the quarter. I was just wondering if you break out a little more strongly what were your strongest areas for bookings.
Paul R. Oldham: Yeah, Mark, it's interesting because we typically talk about backlog when it's expanding, and now it's coming down, and bookings only represent part of our business. But we do think it's sort of one of those indicators that gives us confidence that, you know, things are starting to come back. And we saw increased bookings, frankly, across all of our markets, with the exception of telecom and networking. And as Steve mentioned, I think that market's particularly challenged right now, given both the presence of inventory as well as, you know, quite a bit of soft market conditions. And that's pretty well publicized.
Mark S. Miller: Yeah, Mark it's interesting because.
Mark S. Miller: We typically talked about backlog land expanded and now it's come down in bookings only represents part of our business, but we do think as sort of one of those indicators that gives us confidence that things are starting to come back and we saw increased bookings frankly across all of our markets with the exception of.
Mark S. Miller: Of our telecom and networking and as Steve mentioned I think that market is particularly challenged right now given both having inventory as well as quite a bit soft market conditions, and that's pretty well publicized.
Mark S. Miller: Just wondering, in terms of your current backlog, is it a front-end, back-end, more linear type backlog in terms of how it flows through in terms of sales, and what about the margin profiles? Is it similar or improving in terms of what you're receiving? Yeah, I think the margin profile...
Mark S. Miller: I'm just wondering in terms of your current backlog what does is it a front end back end more linear type backlog in terms of how it flows through in terms of sales, but what about the margin profile is similar or improving.
Mark S. Miller: In terms of what you originally been saying.
Paul R. Oldham: Yeah, I think the margin profile is similar, maybe improving a bit, mainly because of the comments I made earlier about the strength of our portfolio. I think the second part of that is that I think the characterization is still the same.
Speaker Change: Yeah, I think the margin profile is similar may be improving a bit mainly because of the comments I made earlier about the strength of our portfolio.
Mark S. Miller: I think the second part of that is I think that characterization is still the same you have to recognize our lead times now come down to more normalized levels of eight to 12 weeks. So the backlogs pretty I'll say front loaded.
Paul R. Oldham: You have to recognize our lead times now have come down to more normalized levels of 8 to 12 weeks. So the backlog is pretty, you know, I'll say front loaded. But particularly, as Steve mentioned, in medical, we're seeing, you know, backlog, filling in for the second half of the year, which gives us more confidence, again, that at least that part of the market is maybe starting to work through its inventory issues.
Mark S. Miller: But particularly as Steve mentioned in medical we are seeing backlog filling in for the second half of the year, which gives us more confidence again that that at least that part of the market is maybe starting to work through their inventory issues.
Speaker Change: Thank you.
Krish Sankar: And the next question is a follow-up from Krish Sankar with C.D. Cowan. Please proceed with your question.
Speaker Change: And the next question is a follow up from Krish Shankar with TD Cowen. Please proceed with your question.
Krish Sankar: Yeah, I have two quick questions. One is about the hyperscaler opportunity. I don't remember a few years ago when you actually took over, like, you know, there's a renewed focus on INM. I don't want to use the term defocus, but less of a focus on hyperscaler. But clearly, you know, with AI and everything, there's a renewed focus on power management for AI. I'm just curious, you know... Given the fact that, compared to some of your peers, on one of the questions that were asked, you're kind of lagging on that.
Krish Sankar: Yeah, I have two quick questions one oh.
Krish Sankar: You know on the Hyperscale opportunity.
Krish Sankar: I don't remember a few years ago. When you. After you took over like another the renewed focus on <unk>.
Krish Sankar: I don't want to use the term depot goes but less of a focus on hyperthermia, there, but clearly.
Speaker Change: With AI in everything that they need to focus on our power management for.
Speaker Change: So I'm just curious you know.
Speaker Change: You know given the fact that.
Speaker Change: Back to some of your peers like no. Other question that was actually a kind of a lagging on that do you think any of that deep focus in the last few years is putting new now.
Stephen D. Kelley: Do you think any of that defocus in the last few years is hurting you now? Because in the past, I understand hyperscalers, they're very price sensitive, and it's not an extremely winning game for you. But do you think that defocus has been an issue? Or do you think, at the end of the day, it's really about the product quality that matters for AI servers from hyperscalers?
Speaker Change: Because in the past and it's on Hyperscale, they're very price sensitive and it's like not a lot.
Speaker Change: Extremely winning game for you but.
Speaker Change: Do you think that depot, because that had been an issue or do you think of the end of the day, it's really about the product quality that matters.
Speaker Change: So that's from a hyperscale standpoint.
Stephen D. Kelley: Good question, Krish. Let me just recap, you know, the decisions we made a few years ago were to invest heavily in semiconductor industrial medical and grow market share as fast as we could because all those products basically average us out from a gross margin standpoint. So on the data center side, we have a different strategy, and we articulated that a few years ago, and we've executed on it. And that is, we want to improve the bottom line of that business and then keep it there.
Speaker Change: Yeah. Good question Krish.
Speaker Change: Let me just recap.
Speaker Change: The decisions, we made a few years ago were too.
Speaker Change: <unk>.
Speaker Change: Invest heavily in semiconductor industrial medical and grow market share as fast as we could because of all of those products basically averages up from a gross margin standpoint. So.
Speaker Change: On the datacenter side.
Speaker Change: We have a different a different strategy and we articulated that a few years ago and we've executed on it and that is we want to improve the bottom line of that business and then keep it there.
Stephen D. Kelley: So the good news is we improved the bottom line over the past two years in the data center, and now we're in the process of keeping that type of gross margin performance. It's still not above corporate average and probably never will be, but we're much happier with the business today because we can deal with a surge like we're seeing this quarter without impacting our gross margin performance to any significant degree. So we're very happy with the business.
Speaker Change: So the good news is we we improved the bottom line over the past two years in data center.
Speaker Change: And now we're in the process of keeping that type of gross margin performance is still not still not above corporate average and probably never will be.
Speaker Change: But we're much happier with the business today.
Speaker Change: Because we can.
Speaker Change: I deal with the surge like we're seeing this quarter without impacting our gross margin performance to any significant degree.
Speaker Change: So we're very happy with the business.
Stephen D. Kelley: And, you know, part of that move two years ago was to start focusing our engineering teams on more differentiated opportunities. And so what we're seeing now is some of those different engine opportunities are developing into large-scale revenue opportunities for us, which is very helpful. So, less of a commodity focus and more of a differentiated focus, and I think it's paying off for us.
Speaker Change: And you know part of that move two years ago was to start focusing our engineering teams on more differentiated opportunities.
Speaker Change: So what we're seeing now is some of those differentiate opportunities are developing 10th large scale.
Speaker Change: Revenue opportunities for us.
Speaker Change: Which is very helpful. Right, so less of a commodity focus and more of a differentiator focus and I think it's paying off for us.
Paul R. Oldham: Paul, I know you didn't give the backlog number, but it looks like it's probably in the $350-$400 million range. How much of that is it sending?
Speaker Change: Got it got it and then just a quick follow up of ball.
Speaker Change: I know you didn't give the backlog number but it looks like it's probably in the $350 million to $400 million range.
Speaker Change: How much of that is Sydney.
Paul R. Oldham: Yeah, I'd say it's down slightly from last quarter, so maybe a little higher than that, Krish. I would say the SEMI proportion is about the same as it's been, and we've commented before that SEMI and industrial and medical combined represent about 80% of the backlog, so I don't think those proportions have changed very much.
Speaker Change: Yeah, It's I'd say, it's down it's down slightly from from last quarter, or so maybe a little higher than that krish.
Speaker Change: I would say the semi proportion is about the same as it's been and we've commented before that.
Speaker Change: Semi and industrial and medical combined represent about 80% of the of the backlog. So I don't think those proportions have changed very much.
Krish Sankar: Thank you very much.
Speaker Change: Alright awesome. Thank you very much.
Speaker Change: Mhm.
Mark S. Miller: And our next question is a follow-up from Mark Miller with Benchmark. Please proceed with your question.
Speaker Change: And our next question is a follow up from Mark Miller with benchmark. Please proceed with your question.
Mark S. Miller: I'm just wondering, your interest income had a nice increase. Could you describe what's going on there?
Mark S. Miller: I'm just wondering your interest income had a nice increase could you.
Mark S. Miller: Describe what's going on there.
Paul R. Oldham: Yeah, as you know, Mark, we did raise money from the convert last fall. The good news about that is we raised money at a 2.5% coupon, and we've been able to do two things. One, we've been able to concentrate our cash globally quite effectively so that we get that cash in places, in accounts where we can invest it. And we've been quite successful at investing it at very good yields on money market, very short-term notes, and so we're actually generating more interest income than interest expense right now.
Mark S. Miller: Yes, as you know Mark we did we did raise money from the convert last fall.
Speaker Change: The good news about that is we raised money at two 5% coupon and we've been able to do two things one we've been able to concentrate our cash globally quite quite effectively so that we get that cash in the places and in accounts, where we can invest it and we've been quite successful at investing that at very good yields.
Speaker Change: On <unk>.
Speaker Change: Money market very short term.
Speaker Change: Notes and so we're actually generating more interest income then interest expense right. Now now. We're also benefited from the fact that about two thirds of our term loan is still under a swap.
Paul R. Oldham: Now, we're also benefiting from the fact that about two-thirds of our term loan is still under a swap agreement, wherein we're only paying 1.25% interest, and that will come off for that amount in September. So I think you'll see interest income and interest expense start to come a little more in balance, but we'll still have higher income than expense but lower than we have today.
Mark S. Miller: Agreement, wherein we're only paying 1.25% interest.
Mark S. Miller: And that will come off for that that amount in September. So I think you'll see interest income and interest expense start to come a little more in balance that will still have higher income and expense, but lower than we have today.
Mark S. Miller: Okay, so you expect a somewhat lower interest expense in the second quarter.
Mark S. Miller: Okay. So you expect somewhat lower interest expense in the second quarter.
Paul R. Oldham: More like the second half. This happens in September. Otherwise, the second quarter ought to look very similar to the first quarter when you look at total other income.
Mark S. Miller: A more of a more like the second half. This happened. This happens in September otherwise second quarter ought to look very similar to first quarter. When you look at total other income okay, but lower in the second half okay. Thank you that's right.
Mark S. Miller: Okay, but lower in the second half. Okay, thank you. That's right.
Operator: And ladies and gentlemen, at this time there are no further questions, and that also concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Ladies and gentlemen at this time there are no further questions and that concludes the question and answer session and that also concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: [music].
Mark S. Miller:
Mark S. Miller: Yeah.
Mark S. Miller: Yeah.