Q2 2024 Advanced Energy Industries Inc Earnings Call
Operator: Greetings. Welcome to Advanced Energy's second quarter 2024 earnings call. This time, all participants will be in listen-only mode.
Operator: Greetings, welcome to Advanced Energy's second quarter 2024 earnings call. This time, all participants will be in listen-only mode. The question and answer session will follow the formal presentation.
Speaker Change: Greetings. Welcome to Advanced Energy's second quarter 2024 earnings call. This time, all participants will be in listen-only mode. The question and answer session will follow the formal presentation.
Operator: The question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to Edwin Mock, Vice President of Strategic Marketing and Investor Relations. Mr. Mock, you may now begin.
Operator: If any of you should require our Board of Assistance 30 today's conference, please press star zero from your telephone keypad. Please note, this conference is being recorded.
Speaker Change: If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note that this conference is being recorded.
Operator: I'll now turn the conference over to Edwin Mach, Vice President of Strategic Marketing and Invest Relations. Mr. Mach, you may now begin.
Speaker Change: I'll now turn the conference over to Edwin Mock, Vice President of Strategic Marketing and Investor Relations. Mr. Mock, you may now begin.
Edwin Mach: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's second quarter 2024 earnings conference call. With me today are Steve Kelley, our President and CEO, and Paul Oldham, our Executive Vice President and CEO.
Edwin Mock: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's second 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.advancedenergy.com. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future results. Information concerning these risks can be found in our SCC file.
Edwin Mock: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's second quarter 2024 earnings conference call.
Speaker Change: With me today are Steve Kelley, our President and CEO , and Paul Oldham, our Executive Vice President and CFO .
Edwin Mach: You can find our earnings press release and presentation on our website at ir.evanzeng.com. Let me remind you that today's call contains four looking statements that are subjects to recent uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SCC findings. All four looking statements are based on management estimates as of today, July 30th, 2024, and the company assumed no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance.
Edwin Mock: You can find our earnings press release and presentation on our website at www.ir.advanceenergy.com
Speaker Change: Let me remind you that today's call contains four looking statements that are subjects to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance.
Edwin Mock: All foreseeing statements are based on management's estimates as of today, July 30th, 2024, and the company assumes no obligations. Therefore, any targets beyond the current quarter presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP financial basis, unless otherwise noted. Excluded from our non-GAAP results are stock compensation, amortization, accuracy-related costs, Facility Expansion and Related Costs, Restructuring and Accident Impairment Charges, and Unrealized Foreign Exchange Gains. A detailed reconciliation between GAAP and non-GAAP measures can be found in the, With that, let me pass the call to our President and CEO. Thanks, everyone.
Speaker Change: Information concerning these risks can be found in our SEC filings. All for looking statements are based on management's estimates as of today, July 30th, 2024, and the company assumes no obligation to update them.
Speaker Change: Any targets beyond the current corridor presented today should not be interpreted as guidance.
Edwin Mach: On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Exclude from our non-GAAP results are stock, compensation, monetization, accuracy-related costs, facilities for expansion and related costs, restructuring an asset in permanent 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.
Speaker Change: On today's call, our financial results are presented on a non-GAAP financial basis, unless otherwise specified.
Speaker Change: Excluded from our non-GAAP results are stock compensation, amortization, accuracy-related costs, facility expansion and related costs, restructuring and asset impairment charges, and unrealized foreign exchange gains or losses.
Steve Kelley: With that, let me pause the call to our President, CEO, Steve Kelly. Thanks, everyone. Good afternoon, everyone, and thanks for joining the call. Second quarter revenue and earnings per share exceeded our guidance. Strong demand in the data center market, as well as a pull-in of demand in the semiconductor market, drove sequential revenue growth of 11%. Data center revenue grew 74% sequentially as we benefited from strong investments in AI. Our high-efficiency, high-power density products are well-suited for AI servers, which require significantly more power than conventional servers. In industrial medical, revenue was down slightly as customers continued to work through pockets of inventory.
Speaker Change: A detailed recommendation between GAAP and non-GAAP measures can be found in today's press release.
Speaker Change: With that, let me pass the call to our President and CEO , Steve Kelley.
Stephen D. Kelley: Good afternoon, everyone, and thanks for joining the call. Second Quarter Revenue and Earnings Per Share have exceeded our guidance. There is strong demand in the data center market, as well as a pull-in of demand in the semiconductor market, drove sequential revenue growth of $11.3 billion. Data Center revenue grew 74% sequentially, as we benefited from strong investments in AI. High-efficiency, high-power density products are well-suited for AI services, which require significantly more power. [inaudible] and Industrial Medical.
Stephen D. Kelley: Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call.
Stephen D. Kelley: Second quarter revenue and earnings per share exceeded our guidance.
Speaker Change: Strong demand in the data center market, as well as a pull-in of demand in the semiconductor market.
Stephen D. Kelley: drove sequential revenue growth of 11 percent.
Stephen D. Kelley: Data center revenue grew 74% sequentially.
Stephen D. Kelley: as we benefited from strong investments in AI.
Stephen D. Kelley: Our high-efficiency, high-power density products are well-suited for AI servers.
Stephen D. Kelley: which require significantly more power than conventional servers.
Stephen D. Kelley: Revenue was down slightly, but these customers continue to work through pockets of inventory. Distribution sell-through of our industrial medical products increased in the second quarter, since roughly half of our I&M business goes through the channel. This is an encouraging data point and could indicate that we are close to reaching a bottom, and the I&M. Design activity is extremely robust across our product portfolio. We are working intensively with a wide variety of customers to integrate our precision power product into their leading edge, are healthy design windpipes, are expected to drive profitable revenue growth and share gains, as markets recover. To accelerate innovation across multiple markets, we acquired Arity Technologies. Arity is an innovator and High Voltage Power. The focus is on efficient, high-density gallium nitride-based solutions.
Speaker Change: In industrial and medical, revenue was down slightly as customers continued to work through pockets of inventory.
Steve Kelley: However, distribution sell-through of our industrial medical products increased in the second quarter. Since roughly half of our INM business goes through the channel, this is an encouraging data point and could indicate that we are close to reaching a bottom in the INM market. Design activity is extremely robust across our product portfolio. We are working intensively with a wide variety of customers to integrate our precision power product. products into their leading-edge systems. Our healthy design wind pipeline is expected to drive profitable revenue growth and share gain as markets recover.
Speaker Change: However,
Speaker Change: Distribution sell-through of our industrial medical products increased in the second quarter.
Speaker Change: Since roughly half of our I&M business goes through the channel, this is an encouraging data point.
Speaker Change: and could indicate that we are close to reaching a bottom in the I&M market.
Speaker Change: Design activity is extremely robust across our product portfolio.
Speaker Change: We are working intensively with a wide variety of customers to integrate our precision power products into their leading-edge systems.
Speaker Change: Our Healthy Design-Win Pipeline
Speaker Change: is expected to drive profitable revenue growth and share gain as markets recover.
Steve Kelley: To accelerate innovation across multiple markets, we acquired Arity Technologies. Arity is an innovator in high-voltage power with a focus on efficient, high-density, gallium nitride-based solutions. Prior to the acquisition, we work closely with Arity on several joint development projects and feel very good about the technology and talent that Arity brings to Advanced Energy. In operations, we are taking advantage of reduced factory loading to accelerate our consolidation efforts. At the macro level, we are reducing our factory footprint in China, the US, and Europe, while upgrading our factories in Malaysia, the Philippines, and Mexico. Overall, we believe our factory actions will enhance operational productivity, lower fixed costs, and improve product quality.
Speaker Change: To accelerate innovation across multiple markets, we acquired Arity Technologies.
Areti Technologies: Arity is an innovator in high voltage power with a focus on efficient, high density, gallium nitride based solutions.
Stephen D. Kelley: Prior to the acquisition, we worked closely with ARITY on several joint development projects and feel very good about the technology and talent that ARITY brings to ADVANCE in Operations. We are taking advantage of reduced factory loading to accelerate our consolidation at the macro level. We are reducing our factory footprint in China, the U.S., and Europe, while upgrading our factories in Malaysia. Overall, we believe our factory actions will enhance operational productivity, lower fixed costs, and improve product quality.
Areti Technologies: Prior to the acquisition
Speaker Change: We work closely with ARITY on several joint development projects.
Speaker Change: and feel very good about the technology and talent that Airedy brings to Advanced Energy.
Speaker Change: In operations, we are taking advantage of reduced factory loading to accelerate our consolidation efforts.
Speaker Change: At the macro level, we are reducing our factory footprint in China, the U.S. and Europe , while upgrading our factories in Malaysia, the Philippines and Mexico.
Speaker Change: Overall, we believe our factory actions will enhance operational productivity, lower fixed costs, and improve product quality.
Steve Kelley: The consolidation effort is a key part of our plan to cross the 40% gross margin threshold in 2025.
Stephen D. Kelley: The consolidation effort is a key part of our plan to cross the 40% gross margin threshold in 2021. In the short term, we are operating in a dynamic market environment, where forecasting can be a challenge. Because it's important for us to respond quickly to sudden changes in customer demand, we are maintaining staffing levels and strategic inventories that give us added flexibility. Now, let me provide some color on each of our markets.
Speaker Change: The consolidation effort is a key part of our plan to cross the 40% gross margin threshold in 2025.
Steve Kelley: In the short term, we are operating in a dynamic market environment where forecasting can be a challenge. Because it's important for us to respond quickly to sudden changes in customer demand, we are maintaining staffing levels and strategic inventory, which give us added flexibility.
Speaker Change: In the short term, we are operating in a dynamic market environment where forecasting can be a challenge.
Speaker Change: Because it's important for us to respond quickly to sudden changes in customer demand,
Speaker Change: We are maintaining staffing levels and strategic inventory, which give us added flexibility.
Steve Kelley: Now, let me provide some color on each of our markets. Second quarter, semiconductor revenue increased 5% sequentially and exceeded our projections. Based on customer requests, we accelerated some deliveries into the second quarter. We believe that these expedites were largely due to increased AI demand. On the new product front, we are working closely with our key customers to qualify the Evos and Everest platforms for next-generation etch and deposition processes. This qualification activity will migrate from development labs to wafer fabs over the next few quarters. We are expediting delivery schedules to meet this strong demand and now expect to ship more than 200 systems before your end.
Stephen D. Kelley: Second quarter semiconductor revenue increased 5% sequentially and exceeded our projections based on customer requests. We accelerated some deliveries into the second quarter. We believe that these expedites were largely due to increased AI demand on the new product front. We are working closely with our key customers to qualify the EVOS and Everest platforms for Next Generation Etch and Deposition Processing. This qualification activity will migrate from development labs to wafer fabs over the next few quarters.
Speaker Change: Now, let me provide some color on each of our markets.
Speaker Change: Second quarter semiconductor revenue increased 5% sequentially and exceeded our projections.
Speaker Change: Based on customer requests, we accelerated some deliveries into the second quarter.
Speaker Change: We believe that these expedites were largely due to increased AI demand.
Speaker Change: On the new product front, we are working closely with our key customers to qualify the EVOS and Everest platforms for next generation etch and deposition processes.
Speaker Change: This qualification activity will migrate from development labs to wafer fabs over the next few quarters.
Stephen D. Kelley: We are expediting delivery schedules to meet this strong demand and now expect to ship more than 200 systems before year-end. We believe that acceptance of these new platforms will drive share gains in both logic and memory. At Semicon West, we launched the NAVX RF matching network, which pairs directly with our Everest RF generator.
Speaker Change: We are expediting delivery schedules to meet this strong demand and now expect to ship more than 200 systems before year end.
Steve Kelley: We believe the acceptance of these new platforms will drive share gains in both logic and memory applications.
Speaker Change: We believe the acceptance of these new platforms will drive share gains in both logic and memory applications.
Steve Kelley: At Semi-Con West, we launched the NAV-X RF matching network, which pairs directly with our Everest RF generator. The combination features differentiated pulsing capabilities, which enable our customers to deliver best-in-class etch and deposition performance at advanced process nodes. Initial customer feedback has been quite positive. And we expect to have up to 50 NavX units in the field by year end. Industrial and medical designing activity is very strong. With multiple winds recorded in the second quarter across a wide range of industrial applications, including glass coating, test and measurement, and battery production. In medical, we secured important slots in diagnostic and therapeutic applications, including winds and surgical robot systems at four different customers.
Speaker Change: At Semicon West, we launched the NAVX RF Matching Network, which pairs directly with our Everest RF generator.
Stephen D. Kelley: The combination features differentiated pulsing capabilities, which enable our customers to deliver best-in-class etch and deposition performance, and Advanced Processing. Initial customer feedback has been quite positive, and we expect to have up to 50 NAVAX units in the field by year end. Industrial and medical design activity is very strong, with multiple wins recorded in the second quarter across a wide range of industrial applications, including glass coating, Tested Measurement, and Battery Products,
Speaker Change: The combination features differentiated pulsing capabilities which enable our customers to deliver best-in-class etch and deposition performance at advanced process nodes.
Speaker Change: Initial customer feedback has been quite positive.
Speaker Change: and we expect to have up to 50 NAVAX units in the field by year-end.
Speaker Change: Industrial and medical designing activity is very strong, with multiple wins recorded in the second quarter across a wide range of industrial applications.
Speaker Change: including glass coating, test and measurement, and battery production.
Stephen D. Kelley: We secured important slots in diagnostics and Therapeutic Applications, including WINS and Surgical Robot Systems and four different customers. Many of these wins are enabled by the modularity, which enables quick customization to meet specific application needs. Our new website is popular with industrial and medical customers. Web traffic has tripled over the past year. And an increasing number of website inquiries are turning into design wins and Data Center Computing. Our revenue upside was driven by strong demand from both hyperscale customers and Enterprise customers, mainly for AI. We continue to believe that increased AI demand will drive robust revenue levels for several quarters. During the quarter,
Speaker Change: In medical, we secured important slots in diagnostic and therapeutic applications.
Speaker Change: including WINS and Surgical Robot Systems at four different customers.
Steve Kelley: Many of these winds are enabled by the modularity of our latest technology platforms, which enables quick customization to meet specific application needs.
Speaker Change: Many of these wins are enabled by the modularity of our latest technology platforms.
Speaker Change: which enables quick customization to meet specific application needs.
Steve Kelley: Finally, our new website is popular with industrial and medical customers. Web traffic has tripled over the past year, and an increasing number of website inquiries are turning into design wins. In data center computing, our revenue upside was driven by strong demand from both hyperscale and enterprise customers, mainly for AI applications. We continue to believe that increased AI demand will drive robust revenue levels for several quarters. During the quarter, we want a major AI related design at a leading hyperscale customer and expect to begin ramping that wind production later this year. Telecom and networking revenue increased slightly quarter over quarter.
Speaker Change: Finally,
Speaker Change: Our new website is popular with industrial and medical customers.
Speaker Change: Web traffic has tripled over the past year, and an increasing number of website inquiries are turning into design wins.
Speaker Change: In data center computing, our revenue upside was driven by strong demand from both hyperscale and enterprise customers.
Speaker Change: mainly for AI applications.
Speaker Change: We continue to believe that increased AI demand will drive robust revenue levels for several quarters.
Stephen D. Kelley: We want a major AI-related design at a leading hyperscale customer and expect to begin ramping that wind to production later this year. Telecom and networking revenue increased slightly, quarter over quarter. We expect market conditions to remain soft over the next few quarters, given high customer inventory levels and a slow recovery in demand. Now for some closing thoughts.
Speaker Change: During the quarter, we want a major AI-related design at a leading hyperscale customer and expect to begin ramping that win to production later this year.
Speaker Change: Telecom and networking revenue increased slightly, quarter over quarter.
Steve Kelley: We expect market conditions to remain soft over the next few quarters, given high customer inventory levels and a slower recovery in demand.
Speaker Change: We expect market conditions to remain soft over the next few quarters given high customer inventory levels and a slow recovery in demand.
Steve Kelley: Now for some closing thoughts. This year is playing out roughly as planned. We still expect revenue levels to be higher in the second half than the first half, even after some revenue pull-ins into the second quarter. In some semiconductor, we expect 2024 revenue to be similar to 2023, and second half revenue to be better than first half. In data center, we expect third and fourth quarter revenue to be higher than second quarter revenue, driving year on year growth. In industrial medical, we expect that revenue will remain under pressure through the third quarter and into the fourth, as channel and OEM inventory gradually return to normal levels.
Stephen D. Kelley: This year is playing out roughly as... We still expect revenue levels to be higher in the second half than in the first half, even after some revenue pull-ins into the second, and so many others. We expect 2024 revenue to be similar to 2023, and Data Center. We expect 3rd and 4th quarter revenue to be higher than 2nd quarter revenue, driving year-on-year growth in Industrial Medical. We expect that revenue will remain under pressure through the third quarter and into the fourth, gradually returning to normal levels. Looking beyond 2024, we are confident in our ability to drive profitable revenue. This new design wins rent to volume.
Speaker Change: Now for some closing thoughts.
Speaker Change: This year is playing out roughly as planned.
Speaker Change: We still expect revenue levels to be higher in the second half than the first half.
Speaker Change: even after some revenue pull-ins into the second quarter.
Speaker Change: In semiconductor, we expect 2024 revenue to be similar to 2023.
Speaker Change: and second-half revenue to be better than first-half.
Speaker Change: In Data Center, we expect 3rd and 4th quarter revenue to be higher than 2nd quarter revenue, driving year-on-year growth.
Speaker Change: In industrial medical, we expect that revenue will remain under pressure through the third quarter and into the fourth.
Speaker Change: as channel and OEM inventories gradually return to normal levels.
Steve Kelley: Looking beyond 2024, we are confident in our ability to drive profitable revenue growth. As new design winds rant to volume, we expect to benefit from a richer product mix. In addition, the cost benefits of our factory consolidation effort will begin to flow through a P&L later this year. and continue into 2025. Finally, we expect improved market conditions will drive higher revenue and utilization moving forward. Long-term, however, the most important factor driving our growth will be how our customers view advanced energy.
Speaker Change: Looking Beyond 2024
Speaker Change: We are confident in our ability to drive profitable revenue growth.
Stephen D. Kelley: We expect to benefit from a richer product mix. In addition, the cost benefits of our factory consolidation efforts will begin to flow through our P&L later this year and continue into 2025. Finally, we expect improved market conditions will drive higher revenue and utilization moving forward. Long-term, however, the most important factor driving our growth will be how our customers view advanced energy, at Semicon West earlier this month. I had the opportunity to meet with nearly all of our major summit conductors, as a group.
Speaker Change: As new design winds ramp to volume, we expect to benefit from a richer product mix.
Speaker Change: In addition, the cost benefits of our factory consolidation effort will begin to flow through our P&L later this year and continue into 2025.
Speaker Change: Finally, we expect improved market conditions will drive higher revenue and utilization moving forward.
Speaker Change: Long term, however, the most important factor driving our growth will be how our customers view advanced energy.
Steve Kelley: At Semicon West earlier this month, I had the opportunity to meet with nearly all of our major semiconductor customers as a group. They are enthusiastic about how we are bringing new products to market. Development time for Everest and Evo's derivative products is now measured in weeks, enabled by our modular architecture. A few weeks ago, we received a top three supplier award from one of our largest data center customers. This was very meaningful for us. Since we were top three, other more than a thousand suppliers. The award called out our operational execution, high quality, innovative design, and management commitment.
Speaker Change: at Semicon West earlier this month.
Speaker Change: I had the opportunity to meet with nearly all of our major semiconductor customers.
Stephen D. Kelley: They're enthusiastic about how we are bringing new products. Development time for Everest and Evo's derivative product is now measured in weeks, enabled by our modular architecture. A few weeks ago, we received a top three supplier award from one of our largest data center companies. This was very meaningful for us; we were top three out of more than a thousand suppliers. The award called out Operational Execution, Innovative Design, and Management Commitment.
Speaker Change: As a group, they are enthusiastic about how we are bringing new products to market.
Speaker Change: Development time for Everest and EBOS derivative products is now measured in weeks.
Speaker Change: Enabled by our modular architecture.
Speaker Change: A few weeks ago, we received a top three supplier award from one of our largest data center customers.
Speaker Change: This was very meaningful for us.
Speaker Change: since we were top three out of more than a thousand suppliers.
Speaker Change: The award called out our operational execution, high quality, innovative design, and management commitment.
Steve Kelley: Finally, we are receiving positive feedback from our major distributors, who are key partners in our drive to gain industrial and medical share. They feel that AE has become an easier company to do business with in our steering more business our way.
Stephen D. Kelley: Finally, we are receiving positive feedback from our major distributors, who are key partners in our drive to gain industrial and medical share. They feel that AE has become an easier company to do business with, through our Steering More Business Our Way. With that, I'd like to turn it over to Paul, who will provide more detailed financial information. Thank you, Steve, and good afternoon, everyone.
Speaker Change: Finally, we are receiving positive feedback from our major distributors, who are key partners in our drive to gain industrial and medical share.
Speaker Change: They feel that AE has become an easier company to do business with and are steering more business our way.
Paul Oldham: With that, I would like to turn over to Paul, who will provide more detailed financial information. Thank you, Steve, and good afternoon, everyone. Second-quarter revenue increased 11% sequentially to $365 million. A head of our guidance of $350 million driven by strengthening demand in the data center computing market and pull forward of demand in semiconductor. Gross margin was up slightly quarter over quarter, and operating margins improved 270 basis points as we continued to manage our cost structure closely. As a result, we delivered earnings of $0.85 per share above our guidance of 73 cents. Overall, 2024 is playing out as we anticipated, with FOIA revenues and earnings expected to be in line with or better than what we communicated last quarter.
Speaker Change: With that, I'd like to turn it over to Paul, who will provide more detailed financial information.
Paul R. Oldham: Second quarter revenue increased 11% sequentially to $365 million, ahead of our guidance of $350 million, driven by strengthening demand in the data center computing market and a pull-forward of demand in semiconductors. Gross margin was up slightly, quarter over quarter, and operating margins improved 270 basis points as we continued to manage our cost structure closely. As a result, we delivered earnings of $0.85 per share, above our guidance of $0.73.
Paul R. Oldham: Thank you, Steve, and good afternoon, everyone.
Paul R. Oldham: Second quarter revenue increased 11% sequentially to $365 million dollars, ahead of our guidance of $350 million, driven by strengthening demand in the data center computing market and pull forward of demand in semiconductor.
Paul R. Oldham: Gross margin was up slightly, quarter over quarter, and operating margins improved 270 basis points as we continue to manage our cost structure closely.
Paul R. Oldham: As a result, we delivered earnings of $0.85 per share, above our guidance of $0.73.
Paul R. Oldham: Overall, 2024 is playing out as we anticipate, with four-year revenues and earnings expected to be in line with or better than what we communicated last quarter. As Steve mentioned, we are leveraging the current environment to accelerate our plans to consolidate our manufacturing. We now plan to fully close our last production site in China, with final production completed in the first half of 2025.
Paul R. Oldham: Overall, 2024 is playing out as we anticipated, with full-year revenues and earnings expected to be in line with or better than what we communicated last quarter.
Paul Oldham: As Steve mentioned, we are leveraging the current environment to accelerate our plans to consolidate our manufacturing sites. We now plan to fully close our last production site in China, with final production completing in the first half of 2025. Although this action will result in higher transition costs in 2024, it will enable us to further lower our fixed cost structure and increase our confidence to achieve and sustain gross margins of over 40%.
Paul R. Oldham: As Steve mentioned, we are leveraging the current environment to accelerate our plans to consolidate our manufacturing sites.
Stephen D. Kelley: We now plan to fully close our last production site in China, with final production completing in the first half of 2025.
Paul R. Oldham: Although this action will result in higher transition costs in 2024, it will enable us to further lower our fixed costs and increase our confidence to achieve and sustain gross margins of over 40%. Now, let's review our financial results in more detail. Total revenue was $365 million, up 11% sequentially, but down 12% year over year.
Speaker Change: Although this action will result in higher transition costs in 2024, it will enable us to further lower our fixed cost structure and increases our confidence to achieve and sustain gross margins of over 40 percent.
Paul Oldham: Now let's review our financial results in more detail. Total revenue was $365 million, up 11% sequentially, but down 12% year over year. Revenue in the semiconductor market was $188 million, up 5% sequentially and 9% over last year.
Paul R. Oldham: Revenue in the semiconductor market was $188 million, up 5% sequentially and 9% over last year. Solid execution to meet customer needs enabled us to deliver results above our guidance. Service revenue was roughly flat from last quarter. Industrial and medical revenue of $79 million decreased 5% sequentially and 38% from last year's record level, due to continued inventory destocking at both OEMs and distributors.
Speaker Change: Now let's review our financial results in more detail.
Speaker Change: Total revenue was $365 million, up 11% sequentially, but down 12% year-over-year.
Speaker Change: Revenue in the semiconductor market was $188 million, up 5% sequentially and 9% over last year.
Paul Oldham: This year. Solid execution to meet customer needs enabled us to deliver results above our guidance. Service revenue was roughly flat from last quarter. Industrial and medical revenue of $79 million decreased by percent sequentially and 38% from last year's record levels due to continued inventory destocking at both OEMs and distributors. Up 74% quarter of recorder and 24% year over year, well ahead of our guidance. The upside was mainly driven by a strong demand for AI server power solutions from both our hyperscale and enterprise customers. Telecom and networking revenue was $25 million and increased slightly quarter over quarter.
Speaker Change: Solid execution to meet customer needs enabled us to deliver results above our guidance.
Speaker Change: Service revenue was roughly flat from last quarter.
Speaker Change: Industrial and medical revenue of $79 million decreased 5% sequentially and 38% from last year's record levels due to continued inventory destocking at both OEMs and distributors.
Paul R. Oldham: Data Center Computing revenue was $73 million, up 74% quarter over quarter and 24% year over year, well ahead of our guide. The upside was mainly driven by strong demand for AI server power solutions from both our hyperscale and enterprise customers. Telecom and networking revenue was $25 million and increased slightly quarter over quarter. Gross margin was 35.3%, up 20 basis points sequentially and slightly better than our guidance. Gross margins benefited from higher volume, which more than offset the anticipated impact of a less favorable mix.
Speaker Change: Data Center computing revenue is $73 million, up 74% quarter over quarter and 24% year over year, well ahead of our guidance.
Speaker Change: The upside was mainly driven by strong demand for AI server power solutions from both our hyperscale and enterprise customers.
Speaker Change: Telecom and networking revenue was $25 million and increased slightly quarter over quarter.
Paul Oldham: Gross margin was 35.3%, up 20 basis points sequentially and slightly better than our guidance. Gross margins benefited from higher volume, which more than offset the anticipated impact of less favorable mix. Operating expenses were $95 million, up $1.6 million from last quarter on higher R&D to support our customer qualifications of our new platforms. Operating income for the quarter was $34 million. Depreciation was $10 million, and our adjusted EBITDA was $44 million. Other income of $4 million decreased sequentially, primarily due to lower interest income. With our interest rate swap expiring in early September, we expect the other income to be around $3 million for Q3 and $1 million for Q4.
Speaker Change: Gross margin was 35.3%, up 20 basis points sequentially, and slightly better than our guidance.
Speaker Change: Gross margins benefited from higher volume, which more than offset the anticipated impact of less favorable mix.
Paul R. Oldham: Operating expenses were $95 million, up $1.6 million from last quarter on higher R&D to support our customer qualifications for our new platform. Operating income for the quarter was $34 million. The appreciation was $10 million, and our adjusted EBITDA was $44 million. Other income of $4 million decreased sequentially, primarily due to lower interest income. With our interest rate swap expiring in early September, we expect the other income to be around $3 million for Q3 and $1 million for Q4. In Q2, our non-GAAP tax rate was 15.9%, below our target of 17-18% due to the geographic mix of earnings and favorable discrete items.
Speaker Change: Operating expenses were $95 million, up $1.6 million from last quarter on higher R&D to support our customer qualifications of our new platforms.
Speaker Change: Operating income for the quarter was $34 million.
Speaker Change: Depreciation was $10 million and our adjusted EBITDA was $44 million.
Speaker Change: Other income of $4 million decreased sequentially primarily due to lower interest income.
Speaker Change: With our interest rate swap expiring in early September , we expect other income to be around $3 million for Q3 and $1 million for Q4.
Paul Oldham: For Q2, our non-GAAP tax rate was 15.9%, below our target of 17-18% due to geographic mix of earnings and favorable discrete items. We expect the tax rate to be 16-17% for the balance of the year. For 2025, we expect the full adoption of the global minimum tax regime to increase our tax rate to 18-19%. Second quarter EPS was $0.85 per share compared to $0.58 per share in the previous quarter and $1.11 per share a year ago.
Speaker Change: For Q2, our non-GAAP tax rate was 15.9%, below our target of 17-18% due to geographic mix of earnings and favorable discrete items.
Speaker Change: We expect the tax rate to be 16 to 17 percent for the balance of the year.
Speaker Change: For 2025, we expect the full adoption of the Global Minimum Tax Regime to increase our tax rate to 18 to 19 percent.
Speaker Change: Second quarter EPS was $0.85 per share compared to $0.58 per share in the previous quarter and $1.11 per share a year ago.
Paul Oldham: Turning now to the balance sheet, total cash and cash equivalence at the end of the second quarter were $986 million, with net cash of $79 million. The sequentially lower cash balance was partially due to the arid acquisition, which closed on June 20th. Cash low from continuing operations was $7 million, primarily on higher inventory and annual tax payments made in the quarter. Inventory increased $22 million or 6% sequentially, driven by strategic inventory investments and higher revenue. Turns improved slightly to 2.5 times. DSO decreased slightly to 65 days, but receivables increased by $15 million on higher revenue.
Paul R. Oldham: We expect the tax rate to be 16-17% for the balance of the year. For 2025, we expect the full adoption of the Global Minimum Tax Regime to increase our tax rate to 18 to 19%. Second quarter EPS was $0.85 per share, compared to $0.58 per share in the previous quarter and $1.11 per share a year ago. Turning now to The Balance Sheet. Total cash and cash equivalents at the end of the second quarter were $986 million, with net cash of $79 million. This sequentially lower cash balance is partially due to the ARDI acquisition, which closed on June 20.
Speaker Change: Turning now to the balance sheet.
Speaker Change: Total cash and cash equivalents at the end of the second quarter were $986 million with net cash of $79 million.
Speaker Change: The sequentially lower cash balance was partially due to the ARITY acquisition, which closed on June 20th.
Paul R. Oldham: Cash flow from continuing operations was $7 million, primarily due to higher inventory and annual tax payments made in the quarter. Inventory increased $22 million, or 6% sequentially, driven by strategic inventory investments and higher revenue; returns improved slightly to two and a half times. DSO decreased slightly to 65 days, but receivables increased by $15 million on higher revenue. DPO increased two days to six. During the second quarter, we invested $14.8 million in capital, and we continue to expect 2024 CapEx to be approximately 4%. We also made debt principal payments of $5 million and paid $3.8 million in dividends.
Speaker Change: Cash flow from continuing operations was $7 million, primarily on higher inventory and annual tax payments made in the quarter.
Speaker Change: Inventory increased $22 million, or 6% sequentially, driven by strategic inventory investments and higher revenue.
Speaker Change: Turns improved slightly to two and a half times.
Speaker Change: DSO decreased slightly to 65 days, but receivables increased by $15 million on higher revenue.
Paul Oldham: New. DPO increased two days to 60 days. During the second quarter, we invested $14.8 million in CAPEX, and we continue to expect 2024 CAPEX to be approximately 4% of sales. We also made debt principal payments of $5 million and paid $3.8 million in dividends.
Speaker Change: DPO increased two days to 60 days.
Speaker Change: During the second quarter, we invested $14.8 million in CapEx.
Speaker Change: And we continue to expect 2024 CAPEX to be approximately 4% of sales.
Speaker Change: We also made debt principal payments of $5 million and paid $3.8 million in dividends.
Paul Oldham: As noted earlier, this quarter we acquired Arity Technologies, providing us with new capability for high-density, high-voltage power applications. We paid net cash of approximately $13.8 million, excluding customary indemnity holdbacks, and issued approximately 144,000 shares over a three-year period to retain the critical talent in the organization.
Paul R. Oldham: As noted earlier, this quarter we acquired Arity Technologies, providing us with new capability for high-density, high-voltage power applications. We paid net cash of approximately $13.8 million, excluding customary indemnity holdbacks, and issued approximately 144,000 shares over a three-year period to retain the critical talent in the organization. Turning now to our guidance, we expect third-quarter revenue to be up slightly from Q2 on continued strength in data center computing. We expect semiconductor shipments to be roughly flat despite a higher Q2, and Industrial and Medical and Telecom and Networking to remain at similar levels quarter over quarter.
Speaker Change: As noted earlier, this quarter we acquired Arity Technologies, providing us with new capability for high-density, high-voltage power applications.
Speaker Change: We paid net cash of approximately $13.8 million excluding customary indemnity holdbacks.
Speaker Change: and issued approximately 144,000 shares over a three-year period to retain the critical talent in the organization.
Paul Oldham: Turning now to our guidance, we expect third quarter revenue to be up slightly from Q2 on continued strengthening and data center computing. We expect semiconductor to be roughly flat, despite a higher Q2, and industrial and medical and telecom and networking to remain at similar levels quarter over quarter. As a result, we're forecasting our third quarter revenue to be approximately $370 million plus or minus $20 million. We expect gross margins in the third quarter to improve to around 36%, mainly driven by the initial benefits of our manufacturing consolidation activities and lower material premiums. As noted last quarter, we expect operating expenses to increase by $1 to $2 million sequentially to support new product activities and higher variable costs.
Paul R. Oldham: As a result, we're forecasting our third-quarter revenue to be approximately $370 million, plus or minus $20 million. We expect gross margins in the third quarter to improve to around 36%, mainly driven by the initial benefits of our manufacturing consolidation activities and lower material premium. As noted last quarter, we expect operating expenses to increase by one to two million dollars sequentially to support new product activities and higher variable costs. As a result, we expect Q3 non-gap earnings per share to be $0.90, plus or minus $0.25.
Speaker Change: Turning now to our guidance.
Speaker Change: We expect third quarter revenue to be up slightly from Q2 on continued strengthening in data center computing.
Speaker Change: We expect semiconductor to be roughly flat, despite a higher Q2.
Speaker Change: and Industrial and Medical and Telecom and Networking to remain at similar levels quarter over quarter.
Speaker Change: As a result, we're forecasting our third quarter revenue to be approximately $370 million, plus or minus $20 million.
Speaker Change: We expect gross margins in the third quarter to improve to around 36 percent, mainly driven by the initial benefits of our manufacturing consolidation activities and lower material premiums.
Speaker Change: As noted last quarter, we expect operating expenses to increase by $1 to $2 million sequentially to support new product activities and higher variable costs.
Paul Oldham: As a result, we expect Q3 non-GAAP earnings per share to be 90 cents plus or minus 25 cents. In addition, we expect to recognize $25 to $30 million, mainly in the third quarter, in one-time severance and other exit costs related to the closing of our last factory in China.
Speaker Change: As a result, we expect Q3 non-gap earnings per share to be $0.90, plus or minus $0.25.
Speaker Change: In addition, we expect to recognize $25 to $30 million, mainly in the third quarter, in one-time severance and other exit costs related to the closing of our last factory in China.
Paul Oldham: Before opening it up for questions, I want to highlight a few important points. We expect 2024 results to be in line with or slightly better than what we communicated last quarter. We continue to expect semiconductor to be up in the second half and flatish for the year. AI investment is driving strength and data center computing, which should continue for several quarters. We expect that customer inventory destocking will continue to impact industrial and medical through Q3 and into Q4. Telecom and networking appears to have stabilized in the low $20 million range for the next few quarters.
Paul R. Oldham: In addition, we expect to recognize $25 to $30 million, mainly in the third quarter, in one-time severance and other exit costs related to the closing of our last factory in China. Before opening it up for questions, I want to highlight a few important points. We expect 2024 results to be in line with or slightly better than what we communicated last quarter. We continue to expect semiconductor shipments to be up in the second half and flattish for the year. AI investment is driving strength in data center computing, which should continue for several quarters.
Speaker Change: Before opening it up for questions, I want to highlight a few important points.
Speaker Change: We expect 2024 results to be in line with or slightly better than what we communicated last quarter.
Speaker Change: We continue to expect semiconductor to be up in the second half and flattish for the year.
Speaker Change: AI investment is driving strength in data center computing, which should continue for several quarters.
Paul R. Oldham: We expect that customer inventory destocking will continue to impact industrial and medical through Q3 and into Q4. Telecom and networking appears to have stabilized in the low $20 million range for the next few quarters. Finally, we expect gross margins to increase as we execute our manufacturing cost optimization plans and volumes improve.
Speaker Change: We expect that customer inventory destocking will continue to impact industrial and medical through Q3 and into Q4.
Speaker Change: Telecom and networking appears to have stabilized in the low $20 million range for the next few quarters.
Paul Oldham: Finally, we expect gross margins to increase as we execute our manufacturing cost optimization plans and volumes improve. With the closure of our last China production plan, we expect slightly higher transition costs over the next couple of quarters. But we will be in a stronger position to meet our long-term gross margin goals as markets recover in 2025.
Speaker Change: Finally we expect gross margins to increase as we execute our manufacturing cost optimization plans and volumes improve.
Paul R. Oldham: With the closure of our last Chinese production plant, we expect slightly higher transition costs over the next couple of quarters, but we will be in a stronger position to meet our long-term gross margin goals as markets recover in 2025. Beyond the near-term, we have multiple drivers supporting revenue growth. We believe our new products and design wins are creating opportunities for share gain as volume production begins to ramp in 2025. These new products, combined with an improving market environment and normalization of customer inventory levels, should translate to solid growth next year.
Speaker Change: With the closure of our last China production plant, we expect slightly higher transition costs over the next couple of quarters, but we will be in a stronger position to meet our long-term gross margin goals as markets recover in 2025.
Paul Oldham: Beyond the near-term, we have multiple drivers supporting revenue growth. We believe our new products and design wins are creating opportunities for share gain as volume production begins to ramp in 2025. These new products, combined with an improving market environment and normalization of customer inventory levels, should translate to solid growth next year. By investing prudently to enable long-term growth and scale, we expect to deliver leverage in our operating model and accelerated earnings growth.
Speaker Change: Beyond the near term, we have multiple drivers supporting revenue growth. We believe our new products and design wins are creating opportunities for share gain as volume production begins to ramp in 2025.
Speaker Change: These new products, combined with an improving market environment and normalization of customer inventory levels, should translate to solid growth next year.
Paul R. Oldham: By investing prudently to enable long-term growth and scale, we expect to deliver leverage in our operating model and accelerated earnings growth. Finally, we have an active pipeline of potential aq- We are targeting acquisitions that align with our strategy and are committed to financial discipline to create shareholder value over time. With that, we'll take your questions. Operator.
Speaker Change: By investing prudently to enable long-term growth and scale, we expect to deliver leverage in our operating model and accelerated earnings growth.
Paul Oldham: Finally, we have an active pipeline of potential acquisitions. We are targeting acquisitions that align with our strategy and are committed to financial discipline to create shareholder value over time.
Speaker Change: Finally, we have an active pipeline of potential acquisitions.
Speaker Change: We are targeting acquisitions that align with our strategy and are committed to financial discipline to create shareholder value over time.
Operator: With that, we'll take your questions.
Operator: Operator? Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad. The confirmation doesn't indicate your lines in the question queue. Let me press star two if you'd like to remove your question from the queue. For different interviews and speaker equipment, you may be necessary to pick up your handset before pressing the star keys. One moment please, we'll be poll for questions. Thank you.
Speaker Change: With that, we'll take your questions.
Operator: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You can press star 2 if you'd like to remove your question from the queue.
Speaker Change: Operator
Speaker Change: Thank you. We'll now be conducting a question and answer session.
Speaker Change: If you'd like to ask a question at this time, please press star 1 from your telephone keypad. The confirmation tone to indicate your line is in the question queue.
Operator: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you, and our first question is from the line of Joe Caracci with Wells Fargo. I'm pleased to see you with your question. Yeah, thanks for taking the question, guys. Maybe one on the industrial side or industrial medical, can you just talk about your forward visibility and just the visibility into channel inventory based on your guide? It seems like maybe revenue is going to stabilize kind of at this current level. And how do we think about the trajectory? You know, beyond that, and looking into 25? Yeah, Joe. This is Steve.
Speaker Change: Let me press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Stephen D. Kelley: I'd be happy to answer that question. If we just go back to Q4 of 23, that's when we started to see the correction in industrial medical. So we're about 10 months into the correction. And so what we do is we track the inventory and distribution very closely. We track the cell in the distribution, we track the cell through, and then we track inventory.
Speaker Change: One moment please while we poll for questions. Thank you.
Joseph Quatrochi: Thank you, and our first question is from the line of Joe Kirachi with Wells Fargo.
Steve Kelley: Please receive your questions. Yeah, thanks for taking the question, guys. Maybe one on the industrial side or industrial medical. Can you just talk about your forward visibility and the visibility in the channel inventory? Based on your guide, it seems like maybe revenue is going to stabilize kind of in this current level. And how do we think about the trajectory beyond that and looking into the 25th?
Speaker Change: Thank you, and our first question is from the line of Joe Cianracci with Wells Fargo. Pleased to see you with your questions.
Stephen D. Kelley: So the good news is inventory steadily declining in the distributor channel. Resales were up in Q2 after a sharp decline in Q1. And as we look at the trend lines, these metrics... We think that we will reach supply-demand balance somewhere in the Q4-24 or Q1-25 time frame. So we're, we're, we're getting close.
Joseph Michael Quatrochi: Yeah, thanks for taking the question guys. Maybe one on the industrial side or industrial medical. Can you just talk about your forward visibility and just the visibility in the channel inventory based on your guide it seems like?
Speaker Change: Maybe revenue is going to stabilize kind of in this current level. And how do we think about the trajectory, you know, beyond that and looking into 2025?
Steve Kelley: Yeah, Joe, this is Steve. I'd be happy to answer that question. Maybe just go back to queue four of 23. That's when we started to see the correction and industrial medical. So we're about 10 months into the correction. And so what we do is we track the inventory and distribution very closely. We track the cell in the distribution. We track the cell through. And then we track inventory. So the good news is inventory steadily declining in the distributor channel. Resells were up in queue two after sharp declining queue one. And as we look at the trend lines in these metrics, we think that we reach supply demand balance somewhere in the queue four 24 or queue one 25 timeframe.
Speaker Change: Yeah, Joe, this is Steve. I'd be happy to answer that question.
Speaker Change: Maybe just go back to Q4 of 23. That's when we started to see the correction in industrial medical.
Speaker Change: So we're about 10 months into the correction.
Speaker Change: And so what we do is we track the inventory and distribution very closely. We track...
Speaker Change: The cell in, the distribution, we track the cell through, and then we track inventory.
Speaker Change: So the good news is inventory is steadily declining in the distributor channel. Resales were up in Q2 after a sharp decline in Q1.
Speaker Change: And, as we look at the trend lines, these metrics, we think that we reach supply-demand balance somewhere in the Q4-24 or Q1-25 timeframe.
Steve Kelley: So we're getting close. Yeah, I think it's a good indicator for us because roughly half of our INM business goes through distribution. So that's what I think. I think 2025 is going to be a decent year based on the fact that we have a very strong design when pipeline in both industrial and medical. And so I think a lot of those designs are going to ramp into production next year.
Stephen D. Kelley: And I think it's a good indicator for us because roughly half of our I&M business goes through distribution. So that's what I think. I think 2025 is going to be a decent year based on the fact that we have a very strong design pipeline in both industrial and medical. And so I think a lot of those designs are going to ramp into production next year. John, if that's helpful.
Speaker Change: So we're getting close.
Speaker Change: And I think it's a good indicator for us, because roughly half of our I&M business goes through distribution.
Speaker Change: So that's what I think. I think 2025 is going to be a decent year based on the fact that we have a very strong design pipeline in both industrial and medical.
Speaker Change: And so I think a lot of those designs are going to ramp into production next year.
Steve Kelley: And that's helpful. And as a follow-up, you know, as we're thinking about, you know, the recovery and gross margin as we exit this year. And I think in the past you got talked about kind of a revenue target of 400 million exiting or in four queue of trying to get back to the, I think, you know, 37 and a half to 38% gross margin. When we think about the mix of that revenue and the strength maybe an AI relative to maybe a little bit weaker out looking in an INM, how do we balance that from a gross margin perspective?
Stephen D. Kelley: And as a follow-up, you know, as we're thinking about, you know, the recovery and gross margin as we exit this year, I think in the past you guys talked about kind of a revenue target of $400 million for the year, or in 4Q, trying to get back to the 37.5% to 38% gross margin. When we think about the mix of that revenue and the strength maybe in AI relative to maybe a slightly weaker outlook in I&M, how do we balance that from a gross margin perspective?
Speaker Change: And as a follow-up, you know, as we're thinking about, you know, the recovery and gross margin as we exit this year, I think in the past you guys talked about kind of a revenue target of $400 million exiting, or in 4Q, trying to get back to the, I think,
Speaker Change: 37.5% to 38% gross margin.
Speaker Change: When we think about the mix of that revenue and the strength, maybe in AI, relative to maybe a little bit weaker outlook in INM, how do we balance that from a gross margin perspective? Is that revenue level to reach that kind of range of gross margin still the right way to think about it?
Stephen D. Kelley: Is that revenue level to reach that kind of range of gross margin still the right way to think about it? Yeah, we commented on this last time, and I think, generally, that's right. Around $400 million, we're going to be in that range we discussed last time. I think there are a few variables. Obviously, mix can affect it a little bit.
Steve Kelley: Is that revenue level to reach that kind of range of gross margins? So the way we think about it. Yeah, we commented on this last time, and I think generally that's right: around $400 million we're going to be in that range we discussed last time. I think there's a few variables; obviously, Mix can affect it a little bit. You know, higher data center or our high volume product revenue would be a little bit negative. Mixed for that, we saw that a little bit both this quarter and the reverse of that in Q1. But in general, the gross margin on those products has come up over time as we've implemented our strategy and focused more on the differentiated part of this market.
Speaker Change: Yeah, we commented on this last time and I think generally that's right around 400 million dollars we're going to be in that range we discussed last time. I think there's a few variables obviously mixed can affect it a little bit.
Paul R. Oldham: You know, higher data center or our high volume product revenue would be a little bit of a negative mix for that. We saw that a little bit both this quarter and the reverse of that in Q1. But in general, the gross margin on those products has come up over time as we've, you know, implemented our strategy and focused more on the differentiated part of this market. So, the impact of mix on our products might be in the 50 to 75 basis points if you saw something that was heavily balanced one way or the other. So, there could be a little headwind from the mix, you know, around that level.
Speaker Change: Higher data center or high volume product revenue would be a little bit negative.
Speaker Change: Mixed for that. We saw that a little bit both this quarter and the reverse of that in Q1.
Speaker Change: But in general, the gross margin on those products has come up over time.
Steve Kelley: So the impact of Mix on our products might be in the 50 to 75 basis points if you saw something that was heavily balanced one way or the other. So there could be a little headwinds from Mix around that level, but I think we'll show good progress.
Speaker Change: as we've, you know, implemented our strategy and focused more on the differentiated part of this market. So, the impact of mix on our products might be in the 50 to 75 basis point, if you saw something that was, you know, heavily balanced one way or the other. So, there could be a little headwinds from mix.
Steve Kelley: The other thing is that we announced, of course, that we're going to fully close our remaining production site in China, which will be a good thing. It actually allows us to get more fixed costs out of the equation. It'll give us better leverage as markets recover because of that. It will cause a little bit of headwinds; those aren't significant, but it will cause a little bit of headwinds because we'll carry a little extra cost as we ramp up basically other sites to carry that last bit of production that will be coming out of China. So, on balance, we expect margins to improve through Q3 and Q4.
Paul R. Oldham: But I think, you know, we'll show good progress. The other thing is that we have announced, of course, that we're going to fully close our remaining production site in China, which will be a good thing. It actually allows us to get more fixed costs out of the equation. It gives us, you know, better leverage as markets recover. And there could be some benefits if semis are a little stronger. We may have a little bit of a headwind.
Speaker Change: you know, around that level. But I think, you know, we'll show good progress.
Speaker Change: The other thing is that we announced, of course, that we're going to fully close our remaining production site in China, which will be a good thing. It actually allows us to get more fixed costs out of the equation. It gives us better leverage as markets recover because of that.
Speaker Change: It will cause a little bit of headwinds, those aren't significant, but it will cause a little bit of headwinds because we'll carry a little extra cost as we ramp up.
Speaker Change: basically other sites to carry that that last bit of production that will be coming out of China.
Steve Kelley: I think, in general, the model that we gave last time is in the right neighborhood, and there could be some benefits. If semis are a little stronger, we may have a little bit of headwinds, and then depending on where revenue ultimately comes in in Q4, I think that could help us or it could be a little lower. In general, we're on track, we believe, to get to our over 40% gross margins roughly by the middle of next year, assuming markets recover as we've discussed. All of our sort of factory actions should largely be completed by that time.
Speaker Change: So on balance we expect margins to improve through Q3 and Q4. I think in general the model that we gave last time is...
Paul R. Oldham: And then depending on where revenue ultimately comes in in Q4, I think that could help us, or it could be a little lower. In general, we're on track, we believe, to get to our over 40% gross margins roughly by the middle of next year, assuming markets recover as we've discussed. All of our sort of factory actions should largely be completed by that time. I think we'll have a cleaner fixed cost structure, which will give us, again, more leverage as revenues grow from that point. And we feel good about the progress that we're making. Thank you.
Speaker Change: is in the right neighborhood, and there could be, you know, some benefits if, you know, if SEMI's a little stronger.
Speaker Change: We may have a little bit of headwinds, and then depending on where revenue ultimately comes in in Q4, I think that could help us, or it could be a little lower. In general, we're on track, we believe, to get to our over 40% gross margins roughly by middle of next year, assuming markets recover.
Speaker Change: as we've as we've discussed. All of our sort of factory action should largely be completed by that time. I think we'll have a cleaner fixed cost structure which will give us you know again more leverage as revenues grow from that point and we feel good about the progress that we're making.
Steve Kelley: I think we'll have a cleaner fixed cost structure, which will give us, you know, again, more leverage as revenues grow from that point. And we feel good about the progress that we're making.
Joseph Quatrochi: Oh, well, thank you.
Operator: Our next question is from the line of Jim Ricchiuti with Niedermann Company. Hi, thanks. Good afternoon. Question on the data center business. In terms of visibility, how far does it extend?
Jim Rashudy: Our next question is from the line of Jim Rashudy with need of a company.
Speaker Change: Helpful. Thank you.
Speaker Change: Our next question is from the line of Jim Ricchiuti with Niederman Company. Please receive your questions.
Jim Rashudy: Please see with your question. Hi, thanks. Good afternoon.
Steve Kelley: Question on the data center business. In terms of visibility, how far does it extend? Is it going to extend beyond Q4? We gave some directional guidance on that.
James Andrew Ricchiuti: Hi, thanks. Good afternoon. Question on the data center business. In terms of visibility, how far does it extend? Does it go to extend beyond Q4? You gave some directional guidance on that.
Stephen D. Kelley: Does it go to extend beyond Q4? You gave some directional guidance. Yeah, Jim, this is Steve.
Steve Kelley: Yeah, Jim, this is Steve. The hyperscale business, it's interesting. It's a cyclical business. So we've gone through a few of these cycles. And what we've seen every time is, after a period of inventory digestion, the market is strong for typically four to five quarters. So right now, we believe that the momentum in hyperscale will take us through at least Q1, if not Q2, of next year. At the same time, we're gaining market share in some of these AI applications. So we think hyperscale is going to stay strong, perhaps for most of 2025. Thanks, Steve.
Stephen D. Kelley: Yeah, the hyperscale business, it's interesting, it's a cyclical business, so we've gone through a few of these cycles, and what we've seen every time is after a period of inventory digestion, the market is strong for typically four to five quarters. So right now, we believe that the momentum in hyperscale will take us through at least Q1, if not Q2 of next year. At the same time, we're gaining market share in some of these AI applications. So we think hyperscale is going to stay strong, perhaps for most of 2025. Okay, thanks, when that you highlighted it.
James Andrew Ricchiuti: Yeah, Jim, this is Steve.
Stephen D. Kelley: Yeah, the hyperscale business, it's interesting, it's a cyclical business. So we've gone through a few of these cycles. And what we've seen every time is after a period of inventory digestion, the market is strong for typically four to five quarters.
Stephen D. Kelley: So right now, we believe that the momentum in hyperscale will take us through at least Q1, if not Q2 of next year.
Stephen D. Kelley: At the same time, we're gaining market share in some of these AI applications. So we think hyperscale is going to stay strong, perhaps for most of 2025.
Steve Kelley: Win that you highlighted. Does that hyperscale customer, for that AI, does that contribute in meaning plate and QCore, or is that more, you know, initial revenues and then its scales in early 25? I think the best way to view that, that win is probably as a replacement for older technologies that are phasing out. So this is a pretty fast lifecycle market, typically these technologies ramp and then decline within the space of a couple of years. But this is an important one because it's associated with artificial intelligence. And so typically we have roughly 50 to 60 percent more dollar content in those racks than we do with conventional server racks.
Speaker Change: Thanks. That...
Stephen D. Kelley: Does that hyperscale customer for that AI design contribute meaningfully to QCOR, or is that more, you know, initial revenues, and then it scales in early 2025? I think the best way to view that win is probably as a replacement for older technologies that are phasing out. So this is a pretty fast life cycle market; typically, these technologies ramp and then decline within the space of a couple of years.
Speaker Change: when that you highlighted
Speaker Change: Does that hyperscale customer for that AI design, does that contribute?
Speaker Change: in meaningful in QCOR, or is that more, you know, initial revenues and then it scales in early 25?
Speaker Change: I think the best way to view that win is probably as a replacement for older technologies that are phasing out. So this is a pretty fast life cycle market, typically these technologies ramp and then decline within the space of a couple of years.
Stephen D. Kelley: But this is an important one because it's associated with artificial intelligence. And so typically, we have roughly 50% to 60% more dollar content in those racks than we do with conventional server racks. So as we move forward, we're going to see more and more of these AI-type applications in hyperscale. And it's important for us because, you know, many of our differentiators really come into play as the power levels go up. And AI servers consume a lot of power, typically three to five times the power consumption of conventional server racks.
Speaker Change: But this is an important one because it's associated with artificial intelligence.
Speaker Change: And so typically, we have roughly 50% to 60% more dollar content in those racks than we do with conventional server racks. So as we move forward, we're going to see more and more of these AI type applications in hyperscale.
Steve Kelley: So, as we move forward, we're going to see more and more of these AI type applications and hyperscale. And it's important for us because, you know, many of our differentiators really come into play as the power levels go up. And the AI servers consume a lot of power, typically three to five times the power consumption of conventional server racks. So our efficiency becomes very important to customers. Our power density, you know, the ability to put a lot more power into roughly the same size box, becomes extremely important to our customers. And typically, as I, Jim, just quickly, typically, as I said before, as we're winning these applications, they're typically better margin than our historical margins in this, in this market.
Speaker Change: And it's important for us because, you know, many of our...
Speaker Change: differentiators really come into play as the power levels go up.
Speaker Change: and the AI servers consume a lot of power.
Stephen D. Kelley: So our efficiency becomes very important to customers. Our power density, you know, the ability to put a lot more power into roughly the same size box becomes extremely important to our customers. Jim, just quickly, typically, as I said before, as we're winning these applications, they're typically better margined than our historical margins in this market, so I think it contributes positively. I appreciate that color, both of you on that.
Speaker Change: typically three to five times the power consumption of conventional server racks.
Speaker Change: So our efficiency becomes very important to customers. Our power density, you know, the ability to...
Speaker Change: to put a lot more power to roughly the same size box, become extremely important to our customers.
Speaker Change: Jim, just quickly, typically, as I said before, as we're winning these applications, they're typically better margined than our historical margins in this.
Steve Kelley: So I think it contributes positively.
Jim Rashudy: I appreciate their color, both beyond that.
James Andrew Ricchiuti: in this market. So I think it contributes positively.
Stephen D. Kelley: Just the final question for me is just on the pollens that you alluded to. Don't know if you can quantify that or say whether that, you know, which area did that come from memory or any color on some of those pollens.
Jim Rashudy: Just the final question for me is just on the, the Poland's that you alluded to. Don't know if you can quantify that or you can say whether that, you know, which area do that come from memory or any color on some of those poems. I think we commented that I think there's kind of a pull across the board from an AI perspective. So I think it's for some of the, some of the applications that would support that.
Speaker Change: I appreciate that color, both of you on that. Just the final question for me is just on the pollens that you alluded to. Don't know if you can quantify that or say whether that, you know, which area did that come from memory or any color on some of those pollens.
Paul R. Oldham: I think we commented that I think there's kind of a pull across the board from an AI perspective, so I think it's for some of the applications that would support that. You know, it's hard for us to assess exactly the timing of these things, Jim, but we definitely saw some customers accelerate activity into the second quarter, and we'll see the carry-through on that. Obviously, we still feel that our semi, you know, our product selling into semi overall will be up in the second half still, despite that pull-in, and flat-ish, you know, for the full year. So, we'll see how that carries through, but definitely, we saw some acceleration from a couple customers. Thanks a lot.
Speaker Change: I think we commented that I think there's kind of a pull across the board from an AI perspective so I think it's for some of the...
Steve Kelley: You know, it's hard for us to assess exactly, you know, the timing of these things, Jim. But we definitely saw some customers accelerate activity into the second quarter. And we'll see; we'll see the carry-through on that. Obviously, we still feel that our semi, you know, our product selling and the semi overall will be up in the second half still, despite that pull in and, you know, flatish, you know, for the full year. So we'll see how that carries through, but definitely we saw some acceleration from a couple of customers.
Speaker Change: some of the applications that would support that. You know, it's hard for us to assess exactly, you know, the timing of these things, Jim, but we definitely saw.
James Andrew Ricchiuti: Some customers accelerate activity into the second quarter. We'll see the carry-through on that, obviously we still...
James Andrew Ricchiuti: I feel that our product selling in December overall will be up in the second half still despite that pull-in and flat-ish for the full year. So we'll see how that carries through, but definitely we saw some acceleration from a couple of customers.
Jim Rashudy: Okay, thanks a lot.
Krish Sankar: Our next question is from the line of Christian Sankara with TD County.
Operator: Our next question is from the line of Krish Sankar with TD Cowen. Please proceed with your question. Yeah, thanks for doing my question. I had three quick questions. First one is for you, Paul.
Speaker Change: Okay, thanks a lot.
Krish Sankar: We should see with your questions. Yeah, thanks for doing my question. I had three questions. First one is for you, Paul. We gave some color on the phone in one way. I'm kind of curious.
Speaker Change: Our next question is from the line of Krish Sankar with TD Cowen. Please proceed with your questions.
Paul R. Oldham: You gave some color on the 400 million run rate. I'm kind of curious, so are you willing to underwrite that 400 million run rate in 4Q and the 37.5% to 38% gross margin you said before? The reason I'm asking is because it seems like a huge step up from the midpoint of September quarter guidance. And if so, how should we think about that run rate and how it parlayed into calendar 25 for revenue and gross margin? and Then I have two other questions.
Krish Sankar: Thanks for doing my question. I have three key questions. First one is for you, Paul. You gave some color on the 400 million run rate. I'm kind of curious. So are you willing to underwrite that 400 million run rate in 4Q?
Paul Oldham: So are you willing to underwrite the 400 million 100 before kill? And the 37 and a half to 38 person gross margin itself before the reason I'm asking is because it seems like it used to step up from the midpoint of September quarter guidance. And if so, how to think about the run rate and how it's all made into calendar 25 for revenue and gross margin.
Krish Sankar: The reason I'm asking is because it seems like a huge step up from the midpoint of September quarter guidance. And if so, how to think about the grunt rate and how it would fall into calendar 25 for revenue and gross margin. And then I have two other questions.
Paul Oldham: And then I do other questions. Thanks. Yeah, it's a good question. You know, last quarter we talked about some estimates for the fourth quarter, largely trying to get to an annual number. We also said at the time it's hard to handicap each of the quarters, other than that we expected each quarter to grow from the previous quarter.
Paul R. Oldham: Thank you. Yeah, it's a good question. Last quarter we talked about some estimates for the fourth quarter, largely trying to get to an annual number. We also said at the time it's hard to handicap each of the quarters, other than that we expected each quarter to grow from the previous quarter. So at this point, one, we don't typically guide more than a quarter out.
Speaker Change: Yeah, it's a good it's a good question, you know last quarter we talked about
Speaker Change: You know, some estimates for the fourth quarter, largely trying to get to an annual number. We also said at the time it's hard to handicap each of the quarters, other than that we expected each quarter to grow from the previous quarter.
Paul Oldham: So at this point, one we don't typically guide more than a quarter out. Secondly, we still feel good about the full year to be the same or better, and we expect Q4 to be higher. You know, how exactly that will play out between Q3 and Q4, you know, I think is a little bit yet to be seen, you know, particularly given, you know, the dynamics that Steve discussed in industrial and medical. So I think, again, we feel good about kind of the implications of being around $400 million from a margin perspective. I think the structure elements are there; things that it can affect that a little bit plus or minus are going to be mixed.
Paul R. Oldham: Secondly, we still feel good about the full year being the same or better, and we expect Q4 to be higher. But, how exactly that will play out between Q3 and Q4, I think is a little bit yet to be seen, particularly given the dynamics that Steve discussed in industrial and medical. So I think, again, we feel good about the implications of being around $400 million from a margin perspective. I think the structural elements are there.
Speaker Change: So at this point, you know, one, we don't typically guide more than a quarter out.
Speaker Change: Secondly, we still feel good about the full year to be the same or better.
Speaker Change: and we expect Q4 to be higher.
Speaker Change: you know, how exactly that will play out between Q3 and Q4.
Speaker Change: You know, I think there's a little bit yet to be seen, you know, particularly given, you know, the dynamics that Steve discussed in industrial and medical. So, I think, again, we feel good about kind of the implications of being around $400 million.
Speaker Change: From a margin perspective, I think the structural elements are there. Things that can affect that a little bit, plus or minus, are going to be mixed. A little bit of headwinds related to higher transition costs, related to closing our Zhongshan plant. But that will be a net positive in the long run.
Paul Oldham: A little bit ahead when related to higher transition costs related to closing our Jean-Chain plant, but that'll be a net positive in the long run.
Paul R. Oldham: Things that it could affect that are a little bit plus or minus are going to be mixed. A little bit of headwinds related to higher transition costs related to closing our Zhongshan plant, but that'll be a net positive in the long run. Thanks for the call, and then Steve, I'm kind of curious about the cycle. How do you see the shape of the recovery? Clearly, it's not a V-shaped recovery, yet there's a lot of optimism about next year.
Krish Sankar: Got it, got it. Thanks for the call.
Steve Kelley: And then Steve, you know, I'm kind of curious on kind of the cycle. How do you see the shape of the recovery? You know, clearly it's not a big shape recovery. Yet there's a lot of optimism on next year. I'm kind of curious. What do you think of the drivers?
Paul R. Oldham: Thanks for it, Paul.
Speaker Change: I'm kind of curious on the cycle. How do you see the shape of the recovery? Clearly it's not a V-shaped recovery.
Paul R. Oldham: I'm kind of curious; what do you think of the drivers, and also, is there a way to figure out in what quarter? Would that infection happen to see the cyclical recovery, or is that really a factor for loss?
Speaker Change: Yet there's a lot of optimism on next year. I'm kind of curious, what do you think of the drivers, and also, is there a way to figure out at what quarter?
Steve Kelley: And also, is that a way to figure out at what quality would that infection happen to see the cyclical recovery, or is it really tough to investigate?
Speaker Change: Would that infection happen to see the cyclical recovery, or is that really tough to prognosticate?
Steve Kelley: Yeah, Chris, let me just ask a clarifying question because you're kind of coming in and out. Were you talking about the AE as a whole or semiconductor only? Yes, semiconductor. Okay, so what we're seeing is a gradual recovery in 2025. You know, I think we've been dealing with two issues in semiconductor over the past year and a half. The first is obviously demand inflection, but the other issue has been inventory. So I think the good news is we think we've just about worked through the inventory issues downstream, and we think we'll be completely out of the inventory issues by the end of this year.
Stephen D. Kelley: Yeah, Chris, let me just ask a clarifying question because you're kind of coming in and out. Were you talking about AE as a whole or semiconductor only? On the semiconductor side of it. Okay, yeah, semiconductor. Okay, so what we're seeing is a gradual recovery in 2025. You know, I think we've been dealing with two issues in semiconductors over the past year and a half. The first is obviously demand inflection, but the other issue has been inventory.
Speaker Change: Chris, let me just ask a clarifying question because you're kind of coming in and out. Were you talking about AE as a whole or semiconductor only? On the semiconductor side of it. Yeah, semiconductor. So what we're seeing...
Speaker Change: is a gradual recovery in 2025.
Speaker Change: two issues in semiconductor over the past year and a half. The first is obviously demand inflection, but the other issue has been inventory.
Stephen D. Kelley: So I think the good news is we think we've just about worked through the inventory issues downstream, and we think we'll be completely out of the inventory issues by the end of this year. So 2025 will be, you know, fully connected to end customer demand without any inventory influences. What we see in 2025 is an acceleration in the second half, in particular because we believe a lot of these units, these EVOS and Everest units we're shipping into our customer development labs and ultimately into wafer fabs this year, we're going to see a ramp in those products as early as the second half of next year. And so basically, two things together. The first is the market gradually recovering, but we see an acceleration based on our market share gains in plasma power. Thank you very much.
Speaker Change: So I think the good news is we think we've just about worked through the inventory issues downstream.
Steve Kelley: So 2025 will be fully connected with end customer demand without any inventory influences. What we see in 2025 is an acceleration of the second half, in particular, because we believe a lot of these units, these evos and every units, we're shipping into our customer development labs and ultimately into wafer fabs this year. We're going to see a ramp in those products as early as the second half of next year. So basically, two things together: the first is the market gradually recovering, but we see an acceleration based on our market share gains in plasma power.
Speaker Change: and we think we'll be completely out of the inventory issues by the end of this year. So 2025 will be, you know, fully connected with end customer demand without any inventory influences.
Speaker Change: What we see in 2025 is an acceleration in the second half in particular.
Speaker Change: Because we believe a lot of these units, these EVOS and Everest units, we're shipping into our customer development labs and ultimately into wafer fabs this year. We're going to see a ramp in those products as early as the second half of next year.
Speaker Change: And so basically two things together. The first is the market gradually recovering, but we see an acceleration based on our market share gains in plasma power.
Steve Kelley: Sorry, very helpful to see.
Steve Kelley: And then if you just squeeze one last, the past is spoken about like from a technology standpoint, the opportunity for advanced energy in gate all around for conductive edge. Is there a way to cite an opportunity, for example, like you know, the customer who's spoken about how much dollar it is for a hundred thousand later starts a month, is there a way to kind of figure out what advanced energy opportunity is with this gate all around conductive edge for every hundred thousand days with stars or what are the metric you want to use. Thank you.
Speaker Change: Thank you very much.
Stephen D. Kelley: Is there a way to size the opportunity, for example, like, you know, your customers have spoken about how much money it is for 100,000 basel starts a month. Is there a way to kind of figure out what the advanced energy opportunity is with this gate all around the conductive edge for every 100,000 basel starts or whatever metric you want to use? Thank you. You know, I wish there was, but right now, we don't have that formula, so what we're doing is, you know, pushing full speed ahead with both conductor etch and dielectric etch because we think our technology now is a good fit for both applications.
Speaker Change: Is there any decisive opportunity, for example, like, you know, your customers have spoken about how much dollar it is for 100,000 data starts a month?
Speaker Change: Is there a way to kind of figure out what advanced energy opportunity is with this gate all around the conductor edge for every 100,000 ways it starts or whatever metric you want to use? Thank you.
Steve Kelley: You know, I wish there was, but right now we don't have that formula, so what we're doing is, you know, pushing full speed ahead on both Conductor Edge and Dialogue Advocate, because we think our technology now is a good fit for both applications. So we think in the current course and speed that we can increase our share in Conductor Edge where we're already the leader, and we've also break into Dialogue Advocate in a big way, so that goes from, you know, almost not nothing to a significant percentage over the next few years.
Speaker Change: I wish there was, but right now we don't have that formula, so what we're doing is pushing full speed ahead on both conductor etch and dielectric etch, because we think our technology now is a good fit for both applications.
Operator: So we think at the current course and speed that we can increase our share in conductor etch, where we're already the leader, and we can also break into dielectric etch in a big way. So that goes from almost nothing to a significant percentage over the next few years. Our next question is from the line of Steve Barger with KeyBank Capital Markets. Please take your questions. Thanks.
Speaker Change: So we think in the current course and speed that we can increase our share in conductor etch where we're already the leader, and we also break into dielectric etch in a big way. So that goes from almost nothing to a significant percentage over the next few years.
Steve Kelley: Thanks, Pete.
Steve Barger: Our next questions are in the line of Steve Barger with KeyBank Capital Markets.
Pete: Thanks, Pete.
Steve Barger: Let's just use your questions. Thanks. For the Summit Equipment Guidance, you said flat sequentially in 3Q and a flat year versus 2023.
Speaker Change: Our next question is from the line of Steve Barger with KeyBank Capital Markets. Please receive your questions.
Paul R. Oldham: For the semi-equipment guidance, you said flat sequentially in 3Q and a flat year versus 2023. I think that implies 4Q could be down a bit on a year-over-year basis. Can you just square that up with the accelerated delivery request in 2Q and the idea that inventory is pretty much out of the channel by year-end? Yeah, I think, you know, our math shows that a flattish Q3 would be an up quarter in Q4 if you just went to a completely flat year. Obviously, we said it was flattish.
Speaker Change: Thanks.
Robert Stephen Barger: For the semi-equipment guidance, you said flat sequentially in 3Q and a flat year versus 2023. I think that implies 4Q could be down a bit on a year-over-year basis. Can you just square that up with the accelerated delivery request in 2Q and the idea that inventory is pretty much out of the channel by year-end?
Steve Barger: I think that implies 4Q could be down a bit on a year-over-year basis, and can you just square that? That up with the Accelerated Delivery Request in 2Q and the idea that inventory is pretty much out of the channel by year end. Yeah, I think, you know, our math shows, you know, a flatish in Q3 would be up quarter in Q4 if you just went to a completely flat year. Obviously, we said flatish. You know, with the dynamics in the market, there's pluses and minuses. If we have a slow recovery, that could be a little bit better.
Speaker Change: Yeah, I think, you know, our math shows, you know, a flattish in Q3 would be an up quarter in Q4 if you just went to a completely flat year. Obviously, we said flattish.
Paul R. Oldham: You know, with the dynamics in the market, there are pluses and minuses. If we have a slow recovery, that could be a little bit better. If we, you know, things push out, we'd still feel good about, you know, kind of seeing some growth in the second half of this year. So I think, Steve, just checking that we feel like it is an upturn in the second half, and Q4 would be higher than Q3 as we see it today, assuming Q3 is flattish with Q2. And remember, Q2 is higher. So all of that commentary is on a higher level, right?
Speaker Change: You know, with the dynamics in the market, there's pluses and minuses. If we have a slow recovery, that could be a little bit better if we...
Steve Barger: If we, you know, things push out, we still feel good about, you know, kind of seeing some growth. In the second half of this year. So I think Steve, just checking that, you know, we feel like it is up half in the second half. And Q4 would be higher than Q3 as we see it today, assuming Q3 is flatish with Q2. And another Q2 is higher. So all of that commentaries on a higher base, right?
Speaker Change: you know, things push out, we still feel good about, you know, kind of seeing some growth in the in the second half of this year. So I think, Steve, just just checking that, you know, we feel like it is up up half in the second half and Q4 would be higher than Q3 as we see it today, assuming Q3 is flattish with Q3.
Speaker Change: Q2.
Steve Barger: It's on a higher base, but it kind of implies, even if you're up a little bit in 4Q, it's kind of a flatish trend in the last three quarters of the year.
Paul R. Oldham: It's on a higher base, but it kind of implies, even if you're up a little bit in 4Q, it's kind of a flattish trend in the last three quarters of the year, right? So I'm just, I'm just trying to, but you expect a more linear acceleration in 2025, if I'm hearing you right. Yeah, I think that's right.
Steve: It's on a higher base, but it kind of implies, even if you're up a little bit in 4Q, it's kind of a flattish trend in the last three quarters of the year, right? So I'm just trying to, but you expect a more linear acceleration in 2025, if I'm hearing you right?
Steve Barger: So I'm just trying to, but you expect a more linear acceleration in 2025 if I'm hearing you right? Yeah, I think that's right. That's based on a gradual market recovery as different parts of the market recover better in the second half. Steve's described because of kind of the ramp of some of these new technologies.
Paul R. Oldham: That's based on a gradual market recovery as different parts of the market recover better in the second half of Steve's description because of the kind of ramp-up of some of these new technologies. The only thing I'd say, Steve, is look, the one thing we know about this market is that we don't know. And historically, when the semi-market recovers, it recovers quickly, and it's hard to predict the timing of that. So at this point, we're trying to plan prudently. At the same time, we make sure that we have the inventory and people available to respond quickly to customer needs.
Steve: Yeah, I think that's right. That's based on a gradual market recovery as different parts of the market recover better in the second half of Steve's described because of kind of the ramp of some of these new technologies. The only thing I'd say, Steve, is look, the one thing we know about this market is that we don't know.
Steve Barger: The only thing I'd say, Steve, is look, the one thing we know about this market is that we don't know. And historically, when the semi market recovers, it recovers quickly, and it's hard to predict the timing of that. So at this point, we're trying to plan, you know, prudently; at the same time, make sure that we have, you know, the inventory and people available to respond quickly to customer needs. Frankly, we were able to do that this quarter because we were prepared and we're able to accelerate some shipments in from a couple of customers. So we'll continue to be prepared and then monitor how the market goes.
Speaker Change: Historically, when the semi-market recovers, it recovers quickly and it's hard to predict the timing of that. So at this point, we're trying to plan prudently.
Speaker Change: At the same time, make sure that we have, you know, the inventory and people available to respond quickly to customer needs. Frankly, we were able to do that this quarter because we were prepared and were able to accelerate some shipments.
Stephen D. Kelley: Frankly, we were able to do that this quarter because we were prepared and we were able to accelerate some shipments in from a couple of customers. So we'll continue to be prepared and then monitor how the market goes. Got it. And my follow-up question is also for the summit, but related to industrial. It seems like the message from a lot of the auto and industrial semiconductor companies is that the trough is here.
Speaker Change: in from a couple of customers. So we'll continue to be prepared and then monitor how the market goes.
Steve Barger: Got it. And my follow up is also for the semiconductor business, but related to industrial. It seems like the message from a lot of the auto and industrial semiconductor companies is that the trough is here into Q.
Speaker Change: Got it. And my follow-up is also for the semiconductor business, but related to industrial.
Speaker Change: It seems like the message from a lot of the auto and industrial semiconductor companies is that the trough is here in 2Q.
Steve Barger: Do you think the industrial chip cycle is a good leading or concurrent indicator for the industrial equipment cycle that you're diversifying into, or are those two things not really. related. I wouldn't call it a tight relationship.
Stephen D. Kelley: Do you think the industrial chip cycle is a good leading or concurrent indicator for the industrial equipment cycle that you're diversifying into, or are those two things not really relevant? I wouldn't call it a tight relationship, you know, as I view the market. You know, I think it's important to figure out when you went into the supply chain crisis and when you came out of it, right? And then that kind of determines when you reach equilibrium again.
Speaker Change: Do you think the industrial chip cycle is a good leading or concurrent indicator for the industrial equipment cycle that you're diversifying into, or are those two things not really related?
Steve Barger: As I view the market, I think it's important to figure out when you went into the supply chain crisis and when you came out of it. And then that kind of determines when you reach equilibrium again. And so for us in I&M, Industrial Medical, we came out of that supply chain crisis in Q4 last year. So we're 10 months into it. That's why I think we're going to be out of it in Q4 of this year, Q1 of next year. It seems like a reason amount of time in the trends support that thesis. You know, I think in semiconductor, it's been a year and a half now, right?
Speaker Change: I wouldn't call it a tight relationship, you know, as I view the market.
Speaker Change: You know, I think it's important to figure out when you went into the supply chain crisis and when you came out of it, right? And then that kind of determines when you reach equilibrium again.
Stephen D. Kelley: And so for us, in I&M, industrial medical, we came out of that supply chain crisis in Q4 last year. So we're 10 months into it. That's why I think we're going to be out of it in Q4 of this year and Q1 of next year. Seems like a reasonable amount of time, and the trends support that thesis. You know, I think in semiconductors, it's been, you know, it's been a year and a half now, right? I think the industry went negative in Q1 of 2023.
Speaker Change: And so for us, in INM, Industrial Medical, we came out of that supply chain crisis in Q4 of last year. So we're 10 months into it. That's why I think we're going to be out of it in Q4 of this year or Q1 of next year. Seems like a reasonable amount of time in the...
Speaker Change: The trends support that thesis.
Speaker Change: You know, I think in semiconductor, it's been...
Steve Barger: I think the industry went negative in Q1 of 2023. And so I think, you know, we're seeing a point here towards the end of this year where things will probably turn around again. So, you know, I think, like Paul said, it's a best guess, but it's based on historical data; it's based on trends that we're seeing. And, you know, we're not that great at forecasting downturns or upturns, but they do tend to be a little sharper both ways than we first estimated. Understood.
Speaker Change: It's been a year and a half now. I think the industry went negative in Q1 of 2023.
Stephen D. Kelley: And so I think, you know, we're seeing a point here towards the end of this year where things will probably turn around again. So, you know, I think, like Paul said, it's a best guess, but it's based on historical data.
Speaker Change: And so I think...
Speaker Change: You know, we're seeing a point here towards the end of this year where things will probably turn around again.
Speaker Change: So, you know, I think, like Paul said, it's a best guess, but it's based on historical data. It's based on trends that we're seeing.
Stephen D. Kelley: It's based on trends that we're seeing. And, you know, we're not that great at forecasting downturns or upturns, but they do tend to be a little sharper both ways than we first estimated. Okay. Thanks. Our next question is from the line of Mehdi Hosseini with SIG.
Paul R. Oldham: And, you know, we're not that great at forecasting downturns or upturns, but they do tend to be a little sharper both ways than we first estimated.
Mehdi Hosseini: Thanks. Our next question is from the line of Medi Hussaini with FIG.
Speaker Change: Understood, thanks.
Operator: Please proceed with your question. Yes, thanks for taking my question. This is for the team.
Mehdi Hosseini: Please just use your questions. Yes, thanks for taking my question. This was the team.
Speaker Change: Our next question is from the line of Mehdi Hosseini with SIG. Please proceed with your questions.
Stephen D. Kelley: I'm trying to understand your readiness and to what extent you can support customers before building backlog again. So, if I were to take your guide for SEMI, which is about $190-ish, would you be able to get it back to the prior peak of $270 million without having to accrue backlog? In other words, your ability to maintain the term business for the SEMI business unit? Mehdi, I'll start, and I think Paul will finish this one.
Mehdi Hosseini: I'm trying to understand your readiness and to what extent can you support customer before building backlogs again. So if I were to take your guide for semi, which is about a hundred ninety-ish, would you be able to get it back to the prior peak of 270 million without having to accrue backlog. In other words, your ability to maintain a term business for the semi-business unit and how to follow up.
Mehdi Hosseini: Yes, thanks for taking my question.
Mehdi Hosseini: This is for the team.
Mehdi Hosseini: trying to understand your readiness.
Speaker Change: and to what extent can you...
Speaker Change: support customer before building backlog again. So if I were to take your guide for SEMI, which is about a hundred ninety-ish, would you be able to get it back to the prior peak of
Speaker Change: $270 million without having to accrue backlog, in other words, your ability to maintain a term business for the semi-business unit and have a follow-up.
Steve Kelley: Hey, Medi, I'll start, and I think Paul will finish this one. But in a semi-significant part of our business goes through inventory hubs or just-in-time operations. So we don't really have much of a backlog, but what we do is we track the size of the bins that our customers specify, and obviously, as their business picks up, they want more from us; they pull more from those inventory hubs.
Stephen D. Kelley: But in SEMI, a significant part of our business goes through inventory hubs or just in time operations. So we don't really have much of a backlog. But what we do is, you know, we track the size of the bins that our customers specify.
Speaker Change: Hey Mehdi, I'll start and I think Paul will finish this one, but in semi-significant part of our business...
Mehdi: goes through inventory hubs or just-in-time operations. So we don't really have much of a backlog. But what we do is we track...
Stephen D. Kelley: And obviously, if their business picks up, they want more from us; they pull more from those inventory hubs. I think in the I&M business, the industrial medical side, which is not your question but I'll make a comment anyway, you know, I think the backlog is more significant. But again, it's different than the past few years because the lead times are much shorter today. They're typically anywhere between 8 to 12 weeks, and in past years, they've been up to a year, right?
Mehdi: The size of the bins that our customers specify, and obviously as their business picks up, they want more from us, they pull more from those inventory hubs.
Steve Kelley: I think in the I&M business, the industrial medical side, which is not your question, but I'll make it come in anyway. I think the backlog is more significant. But again, it's different than the past few years because the lead times are much shorter today. They're typically anywhere between eight to 12 weeks, and in past years, they've been up to a year. Our visibility is pretty short term and industrial medical today, so that forces us to make some bats and put some inventory in place so we can rack quickly.
Mehdi: I think in the I&M business, the industrial medical side, which is not your question, but I'll make a comment anyway, you know, I think the backlog is more significant.
Mehdi: But again, it's different from the past few years because the lead times are much shorter today. They're typically anywhere between 8 to 12 weeks.
Stephen D. Kelley: And so our visibility is pretty short term in industrial medical today, so that forces us to make some bets and put some inventory in place so we can react quickly. I think maybe to expand on that, Mehdi, I think the question is how fast is the recovery? You know, if it's a sharp recovery, then it's more challenging.
Mehdi: and in past years they've been up to a year, right, and so our visibility is pretty short-term in industrial medical today so that that forces us to to make some bets and put some inventory in place so we could react quickly.
Paul Oldham: I think maybe to expand on that, Mehdi, I think the question is how fast is the recovery? You know, if it's a sharp recovery, then it's more challenging. Having said that, we've invested in strategic inventory, particularly on some of the challenging or long-lead parts, so that we can respond quickly, and we've made sure we've kept that equipped workforce to respond quickly. So, it'll depend on the pace. Certainly, we have the capacity to be at the prior peak or higher, no question about that, and our goal is to manage our material strategies so that we can be pretty responsive to changes in demand.
Mehdi: I think maybe to expand on that, Mehdi, I think the question is how fast is the recovery?
Paul R. Oldham: Having said that, we've invested in strategic inventory, particularly on some of the challenging or long-lead parts so that we can respond quickly, and we've made sure we've kept an adequate workforce to respond quickly. So it'll depend on the pace. Certainly, we have the capacity to be at the prior peak or higher, no question about that. And we're trying to, our goal is to manage our material strategies so that we can be pretty responsive to changes in demand.
Matty: you know, if it's a sharp recovery.
Matty: then it's more challenging. Having said that, we've invested in strategic inventory.
Matty: particularly on some of the challenging or long-lead parts so that we can respond quickly and we've made sure we've kept adequate workforce to respond quickly. So it'll depend on the pace. Certainly we have the capacity to be at the prior peak or higher, no question about that.
Matty: And we're trying to, our goal is to manage our material strategies so that we can be pretty responsive to changes in demand.
Mehdi Hosseini: Sure.
Mehdi Hosseini: Thank you, and as you can imagine, we can never predict the shape of the recovery or downturn. It was only two years ago that OEM customers couldn't get enough, and then after two quarters they couldn't cut back fast enough, and I'm just trying to better understand how you and your OEM partners have been able to capitalize on their learning over the past couple of years to be able to adjust, and given the fact that, back in Semicol, everybody is positive about the prospect of growth in 25, but nobody is planning for it, and I'm just trying to determine your readiness if you have any follow-up before I move on to a second question.
Matty: Thank you. And as you can imagine, we can never predict the shape of...
Paul R. Oldham: It was only two years ago that your OEM customers couldn't get enough, and then after two quarters, they couldn't cut back fast enough. I'm just trying to better understand how you and your OEM partners have been able to capitalize on the learning over the past couple of years to be able to adjust. Given the fact that back in Semicon, everybody is positive about the prospect of growth in 2025, but nobody is planning for it. I'm just trying to determine your readiness.
Matty: the recovery or downturn. It was only two years ago that your OEM customers couldn't get enough and then after two quarters they could then cut back fast enough.
Speaker Change: I'm just trying to better understand how you and your OEM partners have been able to capitalize on your learnings over the past couple of years to be able to adjust, given the fact that back in Semicon, everybody's...
Stephen D. Kelley: I wonder if you have any follow-up before I move on to my second question. Yeah, I would say it's a pretty important topic for us and our customers, yes. And we all acknowledge that these upturns are fast and furious, essentially. And so what we've done is put in place some strategic inventory of spare parts, in particular. Because one thing we do know, based on the past few years, is which of the individual parts are most problematic, right?
Steve Kelley: Yeah, I would say that's a pretty important topic for us and our customers, right? And we all acknowledge that these upturns are fast and furious, essentially, and so what we've done is put in place some strategic inventory of peace parts in particular, because one thing we do know based on the past three years is which of the peace parts are most problematic, right? So the ones we haven't replaced with alternatives, we've taken some insurance in the form of strategic inventory, so we can respond to a quick upside.
Speaker Change: I wonder if you have any follow-up before I move on to my second question.
Speaker Change: Yeah, I would say it's a pretty important topic for us and our customers, right? And we all acknowledge that...
Speaker Change: These upturns are fast and furious, essentially.
Speaker Change: And so what we've done is put in place some strategic inventory of piece parts in particular.
Speaker Change: One thing we do know, based on the past few years, is which of the piece parts are most problematic. So the ones we haven't replaced with alternatives, we've taken some insurance in the form of strategic inventory, so we can respond to a quick upside. The second aspect is staffing.
Stephen D. Kelley: So the ones we haven't replaced with alternatives, we've taken some insurance in the form of strategic inventory, so we can respond to a quick upside. The second aspect is staffing. So we could certainly cut back more in our factories given the current loading, but we chose not to because what we see is quite a bit of demand comes in late in the quarter, and so we have to flex up typically in the last month and a half of the quarter.
Steve Kelley: The second aspect is staffing. So we could have certainly cut back more in our factories, given the current loading, but we chose not to because what we see is quite a bit of demand comes in late in the quarter, and so we have to flex up typically in the last month and a half of the quarter.
Speaker Change: So, we could have certainly cut back more in our factories, given the current loading, but we chose not to, because what we see is, you know, quite a bit of demand comes in late in the quarter, and so we have to flex up, typically in the last month and a half of the quarter.
Paul Oldham: Yeah, thank you for trying, and then Paul, you talked about some increase in topics with two to four quarter of increased per quarter, especially looking into 25 be reasonable. And then as a second follow-up to that, given this increase in your CAPEX this year, I think your CAPEX is on target to increase by a couple of million. Should I assume that you're done with investment, especially resizing, and next year your CAPEX will actually be down on your basis? Yeah, so on CAPEX, I think we said last time we expected CAPEX to be up 1 to 2 million each quarter sequentially through the end of this year. I think it's consistent with the guide we gave, we gave again this quarter.
Stephen D. Kelley: Thank you for... Paul, you talked about some increase in OPEC's budget. Would 2 to 4 quarters of increase per quarter, especially looking into 2025, be reasonable? And then, as a second follow-up to that, given this increase in your capex this year, I think your capex is on target to increase by a couple of million. Should we assume that you're done with investment, especially resizing, and next year your capex would actually be down on a year-over-year basis?
Speaker Change: Thank you for trying. And then, Paul, you talked about some increase in OPEX.
Paul R. Oldham: Would 2 to 4 quarters of increase per quarter, especially looking into 2025, be reasonable?
Paul R. Oldham: as a second follow-up to that.
Speaker Change: Given this increase in your CapEx this year, I think your CapEx is on target to increase by a couple of million. Should we assume that you're done with investment, especially resizing, and next year your CapEx would actually be down on a year-over-year basis?
Paul R. Oldham: Yeah, so on OPEX, I think we said last time we expected OPEX to be up 1 to 2 million each quarter sequentially through the end of this year. I think that's consistent with the guidance we gave again this quarter. Next year, certainly, we have normal merit inflation cycles, but in general, our base operating cost structure should stay pretty stable. So we'll have variable costs that go with that, very selective hiring is all, and normal inflation. So that's a little bit how you should think of it.
Speaker Change: Yeah, so on OPEX, I think we said last time we expected...
Speaker Change: VEX to be up 1 to 2 million, you know, each quarter sequentially through the end of this year. I think that's consistent with the guide we gave again this quarter. You know, next year...
Paul Oldham: Next year, certainly we have normal merit and inflation cycles, but in general, our base operating cost structure should stay pretty level. So, we'll have variable costs that go with that, very selective hiring as all, and normal inflation. So, that's a little bit how you should think of it. In general, we'd expect to grow revenue; I'm sorry, grow expenses, the half the rate of sales growth. Now, sales growth quite quickly. Again, we don't need to scale up; we can get a lot of leverage out of our expense structure. From a capital perspective, we are running ahead because we're doing these factory transitions, we're investing in NPI tools and capability with our new products coming, and we have some infrastructure investments we're making in systems and tools, as we've talked about. So I think these largely conclude sort of the middle-ish to late next year. So certainly, as you go out in time, 12 to 18 months, we'd expect to see our CAPX revert back towards kind of a 2 to 3% rather than a 4% of revenue.
Speaker Change: You know, certainly we have normal merit in inflation cycles, but in general, you know, our base operating cost structure...
Speaker Change: should stay pretty level. So we'll have variable costs that go with that.
Paul R. Oldham: In general, we expect to grow revenue at half the rate, and I'm sorry, grow expenses at half the rate of sales growth. Now, if sales grow quite quickly, again, we don't need to scale up. We can get a lot of leverage out of our expense structure.
Speaker Change: I'm sorry, grow expenses at half the rate of sales growth. Now, if sales grows quite quickly, again, we don't need to scale up. We can get a lot of leverage out of R.
Paul R. Oldham: From a capital perspective, we are running ahead because we're doing these factory transitions. We're investing in MPI tools and capability with our new products coming. And we have some infrastructure investments we're making in systems and tools, as we've talked about. So I think these largely will conclude sort of the middle-ish to late next year. So certainly, as you go out in time, 12 to 18 months, we'd expect to see our CAPEX revert back towards kind of 2% to 3% rather than 4% of revenue. Thank you, guys. Thank you.
Speaker Change: out of our expense structure. From a capital perspective, we are running ahead because we're doing these factory transitions.
Speaker Change: We're investing in MPI tools and capability with our new products coming. And we have some infrastructure investments we're making in systems and tools as we've talked about. So I think these largely conclude.
Speaker Change: sort of the middle-ish to late next year. So, you know, certainly as you go out in time, you know, 12 to 18 months, we'd expect to see our CAPEX revert back towards the, you know, kind of a 2 to 3 percent rather than a 4 percent of revenue.
Mehdi Hosseini: Thank you, guys.
Operator: Thank you. As a reminder to ask a question today, you may press star one.
Speaker Change: Thank you, guys.
Operator: Our next question is from the line of Scott Graham with Seaport Research. Yes. Hey, good afternoon.
Scott Graham: Our next question is from the line of Scott Graham. Let's see, Port Research. Please receive the questions. Yes, hey, um, could have to do. Thanks for taking the question. Well done quarter.
Speaker Change: Thank you. As a reminder, to ask a question today, you may press star 1.
Speaker Change: Our next question is from the line of Scott Graham with Seaport Research. Please receive your questions.
Operator: Thanks for taking the question. Well done, quarter. I have several questions, and I hope they're easy and quick so I can get to all three or four.
Scott Graham: Hey, good afternoon. Thanks for taking the question. Well done, quarter.
Steve Kelley: I have several questions, and I hope they're easy and quick so I can get to all three or four of them. The T&N business, the telecom business, we all know telecom is a weak market, but, you know, is that a business where we're at a level of revenue now where maybe, you know, we're thinking, you know, more strategically it doesn't make sense. Or are we thinking that there's going to be a big pop in this thing at some point, and we're going to kind of get back. I mean, you know, the sales of the business are, you know, more than 40% down.
Scott Graham: I have several questions and I hope they're easy and quick so I can get to all three or four of them.
Paul R. Oldham: The TNN business, the telecom business, we all know telecom is a weak market, but..., you know, is that a business where we're at a level of revenue now where maybe, You know, we're thinking, you know, more strategically, it doesn't make sense? Or are we thinking that there's going to be a big pop in this thing at some point, and we're going to kind of get back? I mean, you know, the sales of the business are, you know, more than 40% down.
Speaker Change: The TNN business, the telecom business, we all know telecom is a weak market, but...
Speaker Change: You know, is that a business where we're at a level of revenue now where maybe…
Speaker Change: you know, we're thinking, you know, more strategically, it doesn't make sense.
Speaker Change: Or are we thinking that there's going to be a big pop in this thing at some point, and we're going to kind of get back, I mean, you know, the sales of the business are, you know, more than 40% down, and I'm just, you know, kind of wondering what your longer term thinking on this thing is. Can this pop back up?
Paul R. Oldham: And I just, you know, kind of wondering what your longer-term thinking on this thing is. Can this pop back up? Yeah, I think you've captured the dynamics pretty well. And for a while, we've said that this market isn't one that is experiencing a lot of growth. It's kind of a sustained business. We did see a pretty big ramp up the last couple of years coming out of the supply chain crisis. So it's down a lot, but it was up a lot. Both of those, I think, were kind of unusual.
Steve Kelley: And I just, you know, kind of wondering what your longer term thinking on this thing is. Can this pop back up? Yeah, I think you've captured the dynamics pretty well. And for a while, we've said that this market isn't one that has a lot of growth. It's kind of a sustained business. We did see a pretty big ramp the last couple of years. They're coming out of the supply chain crisis. So it's down a lot that it was that it was up a lot. Both of those, I think, were kind of unusual. So it is getting back towards, you know, maybe a bottom now in a steady state might be a little higher than this.
Speaker Change: Yeah, I think you've captured the dynamics pretty well, and for a while we've said that this market isn't one that has a lot of growth, it's kind of a...
Speaker Change: sustained business. We did see a pretty big ramp the last couple of years.
Speaker Change: coming out of the supply chain crisis. So it's down a lot, but it was up a lot. Both of those, I think, were kind of unusual. So it is getting back towards, you know, maybe a bottom now and a steady state might be a little higher than this.
Paul R. Oldham: So it is getting back towards, you know, maybe a bottom now, and a steady state might be a little higher than this. But look, in this market, like others, we have some marquee customers. We have some places where we can focus, where we think we can make reasonable returns. And all of these markets have a lot in common. We share common architecture, common products, and common manufacturing, so it's not something that's easy to sort of carve out.
Steve Kelley: But look, in this market, like others, we have some market customers; we have some places where we can focus, where we think we make reasonable returns. And all of these markets, they have a lot in common. We share common architecture, common products, common manufacturing. So it's not something that's easy to sort of carve out. Rather, we're able to capitalize on kind of the whole, to have a reasonable, reasonable business. It's not when we want to grow a lot; I think we can because of the market. And, you know, again, focusing on what we think that the returns are reasonable.
Speaker Change: But look, in this market, like others, we have some marquee customers.
Speaker Change: some places where we can focus, where we think we make reasonable returns.
Speaker Change: And all of these markets, they have a lot in common. We share common architecture, common products, common manufacturing.
Paul R. Oldham: Rather, we're able to capitalize on kind of the whole to have a reasonable business. It's not one we want to grow a lot or think we can because of the market. And, you know, again, focusing on where we think the returns are reasonable. But I wouldn't say we would strategically expect to divest of this product. Thank you for answering that so succinctly.
Speaker Change: So it's not something that's easy to sort of carve out, rather we're able to capitalize on kind of the whole, to have a reasonable business. It's not one we want to grow a lot or think we can because of the market.
Scott Graham: But I wouldn't say we strategically would expect to divest of this product. Thank you for answering that.
Speaker Change: And, you know, again, focusing on where we think the returns are reasonable, but I wouldn't say we strategically would expect to divest of this product.
Steve Kelley: So thank you. The data centers business, you know, CB educated, it'll should be up strongly the next couple quarters.
Stephen D. Kelley: The data centers business. You know, Steve, you indicated that it should be up strongly in the next couple of quarters. I guess I'm just wondering why not longer, maybe not at the pace of this past quarter, but... Is it that your customers are saying something that is giving you, you know, a little bit of hesitancy? [inaudible] The thing I read is saying that this market is going to be growing fairly strongly for the next... you know, several years, as in three to five type things. So I'm just wondering why you limited your comments for the next couple.
Speaker Change: Thank you for answering that so succinctly. The data center's business, you know, Steve, you indicated it should be up strongly in the next couple quarters. I guess I'm just wondering why not longer, maybe not at the pace of this past quarter, but...
Steve Kelley: I guess I'm just wondering why not longer, maybe not a piece of this best quarter, but is it your customer saying something that are that is giving you, you know, a little bit of peasants, see to not go beyond next couple quarters. I'm just wondering because I believe that everything I read is saying that this market is going to be growing fairly strongly for the next, you know, several years as in three to five type things. So just wondering why you limited your comments in next couple quarters. Yeah, let me just clarify, we think data center is going to be strong into 2025.
Steve: Are your customers saying something that is giving you, you know, a little bit of hesitance?
Speaker Change: See to not go beyond the next couple quarters. Is there
Speaker Change: I'm just wondering, because I believe that...
Speaker Change: Well, Gary, the thing I read is saying that this market is going to be growing fairly strongly for the next, you know, several years, as in three to five type things. So, I'm just wondering why you limited your comment to the next couple quarters.
Stephen D. Kelley: Yeah, let me just clarify. We think data center is going to be strong into 2025. And I think you're right, the long-term trends are very positive. I mean, more and more data generation, storage, and transmission, so there's nowhere to go but up over time. But this is a cyclical market, and typically, after a digestion period, which you just exited in Q1 of this year, we're going to have at least four to five quarters of really strong revenue.
Gary: Yeah, let me just clarify. We think data centers are going to be strong into 2025. And I think you're right. Long-term trends are very positive. I mean, more and more data generation, storage, transmission. So it's nowhere to go but up over time. But this is a cyclical market.
Steve Kelley: And I think you're right; long-term trends are very positive. I mean, more and more data generation, storage, transmission. So it's nowhere to go up over time. But this is a sickle market. And so typically after a digestion period, which you just exited, Q1 of this year. We're going to have at least four to five quarters of really strong revenue. And so, you know, that's about as much as we're willing to forecast right now. But, you know, I think given the trends towards AI. and some of our market share gains in specialty areas within hyperscale.
Gary: And so, typically, after a digestion period, which you just exited in Q1 of this year, you know, we're going to have at least four to five quarters of really strong revenue.
Stephen D. Kelley: And so, you know, that's about as much as we're willing to forecast right now. But, you know, given the trends towards AI and some of our market share gains in specialty areas within hyperscale, there's a chance we could sustain this type of revenue level through 25, but I'm not going to venture right now and say that we will for certain. Okay, thank you. That was, that was great.
Gary: And so, you know, that's about as much as we're willing to forecast right now. But, you know, I think given the trends towards AI,
Gary: and some of our market share gains in specialty areas within hyperscale. You know, there's a chance we could sustain this type of revenue level, you know, through 25, but I'm not going to venture right now and say that we will for certain.
Steve Kelley: There's a chance we could sustain this type of revenue level through 25, but I'm not going to venture right now and say that we will for certain.
Scott Graham: Okay, thank you. That was great.
Stephen D. Kelley: I just maybe want to go back and revisit the answer to a previous question when I think Tim was trying to unbundle for growth in the semiconductor market or somebody else. I'm just curious as to, you know, aside from sort of the pull forward that you're talking about, memory, I mean, any more color you can give on giving in your business, maybe, again, away from that pull forward, you know, why it feels like you're a little bit more optimistic there. Yeah, you know, I think it's difficult for me to add too much to the market commentary that's already out there.
Scott Graham: I just maybe want to go back and revisit the answer to a previous question when Tim was trying to unbundle the growth in the semiconductor market or somebody else.
Speaker Change: Okay, thank you. That was great. I just maybe want to go back and revisit the answer to a previous question.
Speaker Change: I think Jim was trying to unbundle for growth in the semiconductor market or somebody else. I'm just curious as to, you know, aside from sort of the pull forward that you're talking about,
Steve Kelley: I'm just curious as to, aside from the poll four that you're talking about, the logic versus memory, any more color you can give in your business, maybe again away from that poll forward, you know, why it feels like you're a little bit more optimistic there. Yeah, you know, I think it's difficult for me to add too much to the market commentaries already out there. There's a lot of prognosticators who forecast what's happening in NAND and DRAM and logic and so forth. But what I can say is that with our new technologies, Evos and Everest and now NavX, which was just introduced earlier this month at Semicon West, we are working very closely with our customers to secure two of record status on the leading edge memory and leading edge logic processes.
Speaker Change: Logic versus...
Speaker Change: memory I mean any more color you can give on give in your business maybe again away from that pull forward you know why it feels like you're a little bit more optimistic there
Speaker Change: Yeah, you know, I think it's difficult for me to add too much to the market commentary that's already out there. There's a lot of prognosticators who forecast what's happening in NAND and DRAM and logic and so forth. But what I can say...
Stephen D. Kelley: There are a lot of prognosticators who forecast what's happening in NAND and DRAM and logic and so forth. But what I can say is that with our new technologies, EVOS and Everest and now NEVEX, which was just introduced earlier this month at Semicon West. We are working very closely with our customers to secure tool of record status on leading-edge memory and leading-edge logic processes. So this is very, very important. And we mentioned it during the scripted part of the call, but let me just repeat it.
Speaker Change: is that with our new technologies, EVOS, NEVREST, and now NEVX, which was just introduced earlier this month at Semicon West,
Speaker Change: We are working very closely with our customers to...
Speaker Change: to secure tool of record status on the leading-edge memory and leading-edge logic processes. So this is very, very important.
Steve Kelley: So this is very, very important. And we mentioned it during the scripted part of the call. But let me say, we have orders for over 200 of these Evos and Everest products this year, right? And so we're hustling to deliver these products to our customers. And in turn, they're working with their customers, get these technologies qualified in wafer fabs and in production as soon as the second half of next year. So we see, you know, some friends that are very connected to market growth next year, but some are independent because it enables us to gain share, particularly in leading edge.
Speaker Change: and we mentioned it during the scripted part of the call. But let me just repeat, today we have orders for over 200 of these EVOs in Everest.
Stephen D. Kelley: You know, today we have orders for over 200 of these EVOS and Everest products this year, right? And so we're hustling to deliver these products to our customers. And in turn, they're working with their customers to get these technologies qualified in wafer fabs and in production as soon as the second half of next year. So we see some trends that are very favorable for advanced energy.
Speaker Change: products this year, right? And so we're hustling to deliver these products to our customers.
Speaker Change: and in turn, they're working with their customers to get these technologies qualified.
Speaker Change: in wafer fabs and in production as soon as the second half of next year. So we see, you know, some trends that are very favorable for advanced energy. Some of those are connected to market growth next year, but some are independent because it enables us to gain share, particularly in leading edge.
Stephen D. Kelley: Some of those are connected to market growth next year, but some are independent because it enables us to gain share, particularly in leading edge. That's great. Thanks, Steve. Thanks. Our next question is from Mark Miller with Benchmark. I'm just wondering if you can quantify the effect of lower factory loading on your merger. I think you said lower factory loading.
Scott Graham: That's great. Thank you.
Steve: That's great. Thanks, Steve.
Mark Miller: Our next question is from the line of Mark Miller with Benchmark.
Paul R. Oldham: Is that right, Mark? Okay. Yeah, what we've said, maybe the reverse of that is that we think that there's roughly 50 basis points of margin improvement. Sorry, 100 basis points of margin improvement for roughly every 50 million of incremental revenue. So you could certainly anticipate that on the downside as well. That's been the biggest contributor recently. Why we haven't seen a pickup in margins as material costs get better is because revenues have been lower.
Paul Oldham: This is you with your question. Just wondering if you can quantify the effect of lower factory loading on your margins? I think you said lower factory loading. Is that right, Mark? Okay. Yeah. What we've said, maybe the reverse of that is that we think that there's roughly 50 basis points of margin improvement. I'm sorry, 100 basis points of margin improvement for roughly every 50 million of incremental revenue. So you could certainly anticipate that on the downside as well. That's been the biggest contributor recently why we haven't seen a pickup in margins as material costs got better is because revenues have been lower.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Mark Miller with Benchmark. Please proceed with your question.
Mark S. Miller: Just wondering if you could quantify the effect of lower factory loading on your margins?
Mark S. Miller: I think you said lower factory loading. Is that right, Mark? Okay.
Mark S. Miller: [inaudible]
Speaker Change: So, you can certainly anticipate that on the downside as well. That's been the biggest contributor recently why we haven't seen a pickup in margins as material costs got better is because revenues have been lower. So, I think that's the way to think about it, Mark.
Paul R. Oldham: So I think that's the way to think about it, Mark. And the impression I've gotten from the call and the questions is that, in terms of semiconductor book and backlog, it's kind of flattish, or is it better?
Paul Oldham: So I think that's the way to think about it, Mark.
Paul Oldham: And the impression I've gotten from the call and the questions is that, in terms of semi-inductive bookings and backlog, it's kind of flatish. Where is it better? Again, there's not really a backlog concept in Semicas, so many of our customers pull from jet pins. But generally, we think that the inventory, rationalization, we're largely through that, and that we're generally shipping at the demand levels, particularly as we go through the balance of the year. And that this market will bounce around here and should trend up over time. It's hard to call that in the very near term.
Speaker Change: And the impression I've gotten from the call and the questions is that in terms of semiconductor bookings...
Mark S. Miller: And backlog, it's kind of flattish, or is it better than that?
Paul R. Oldham: Again, there's not really a backlog concept in SEMI because so many of our customers pull from JetPens, but generally, we think that we're largely through the inventory rationalization and that we're generally shipping kind of at demand levels, particularly as we go through the balance of the year, and that this market will bounce around here and should trend up over time. It's hard to call that in the very near term, but we feel really good about all these markets, and we have a great set of new products coming that should accelerate growth as things recover. Thank you. Yep. Thank you. This will conclude our question and answer session. This also concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.
Speaker Change: Again, there's not really a backlog concept in SEMI because so many of our customers pull from JitPens, but generally we think that the inventory rationalization, we're largely through that.
Speaker Change: and that we're generally shipping, you know, kind of at the demand levels, particularly as we go through the balance of the year, and that this market will bounce around here and should trend up over time.
Paul Oldham: But we feel really good about, you know, all these markets have been in a downturn for a while, and we have a great set of new products coming that should accelerate growth as things recover. Thank you. Yep.
Speaker Change: It's hard to call that, you know, in the very near term, but we feel really good about, you know, all these markets have been in a downturn for a while and we have a great set of new products coming that should accelerate growth as things recover.
Operator: Thank you.
Operator: This will conclude our question and answer session. This will conclude today's conference. Thank you for your participation.
Speaker Change #100: Thank you.
Speaker Change #100: Yep.
Speaker Change #101: Thank you. This will conclude our question and answer session. This also concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.
You may have disconnect your lines and have a wonderful day.