Q4 2024 Advanced Energy Industries Inc Earnings Call
Speaker Change: Greetings, and welcome to the Advanced Energy 4th Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star 0 on your telephone keypad. And as a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce to you Edwin Mock, Vice President of Strategic Marketing and Investor Relations.
Thank you, sir. You may begin.
Speaker Change: Thank you, Operator. Good afternoon, everyone. Welcome to ADVANCE NG fourth quarter and full year 2024 earnings conference call.
Speaker Change: With me today are Stephen Kelley, our President and CEO, and Paul Oldham, our Executive Vice President and CFO.
Speaker Change: Before we begin, let me remind you that today's call contains four looking statements. They are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance.
Speaker Change: Information concerning these risks can be found in our SCC filings.
Speaker Change: All four looking statements are based on management estimates as of today, February 12, 2025, and the company assumes no obligation to update them.
Speaker Change: Any targets beyond the current quarter presented today should not be interpreted as guidance.
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, acquisition related costs, facility expansion and relocation costs, restructuring and asset impairment charges, and unrealized foreign exchange gains or loss.
Speaker Change: Please refer to a detailed recommendation between GAAP and non-GAAP results in a press release today.
Speaker Change: With that, let me pause to call to our President and CEO, Steve Kelley.
Speaker Change: Thanks, everyone. Good afternoon, everyone, and thanks for joining the call.
Speaker Change: Today, Paul and I will discuss our fourth quarter performance, highlights from 2024,
our first quarter outlook and our 2025 priorities.
We delivered strong financial results in the fourth quarter.
Speaker Change: Revenue of $415 million exceeded a high end of our guidance range and returned the company to year-over-year growth.
Speaker Change: Pockets of higher demand in semiconductor, as well as strength and data center computing.
drove the outperformance.
Speaker Change: Fourth quarter gross margin was 38%, our best performance in three years.
Speaker Change: We benefited from higher volume as well as improved factory efficiency.
Fourth quarter earnings of $1.30 per share.
were above our guidance and grew year on year.
Before providing more details on the fourth quarter.
I'd like to review our 2024 performance.
Speaker Change: From a financial standpoint, we hit a low point in the first quarter of 2024.
Data Center Computing rebounded strongly in the second quarter.
as our design wins ramped to volume.
Spurred by demand for AI compute capability.
Data center demand continued to increase in the second half.
and remains very strong.
Speaker Change: Semiconductor revenue also grew over the course of the year as we capitalized on a variety of upside opportunities.
Speaker Change: and I'm going to be talking about the the the the the the the the the the the the the the
Speaker Change: The industrial, medical, telecom and networking markets were headwinds to revenue in 2024.
The I&M market underperformed.
Due to the lackluster demand
Speaker Change: as well as elevated inventory levels at both distributors and end customers.
As expected,
Speaker Change: Telecom and networking revenue reverted to more normal levels after a very strong 2023.
Speaker Change: In 2024, we made major strides on the new product and design win fronts.
We launched 35 new platform products in 2024.
Speaker Change: In addition, we develop many custom and modified standard products in close cooperation with our customers.
and semi-conductor.
Speaker Change: We continue to experience strong customer pull for our best-in-class EVOS, Everest, and NAVX products.
Speaker Change: We ship more than 250 qualification units by the end of last year.
and are experiencing continued strong demand this year.
in 2024.
Speaker Change: We began to reap the benefits of our move to a modular architecture.
Speaker Change: The typical development cycle time for new derivative products has been compressed from roughly 18 months to less than 4 months.
Speaker Change: Another benefit is that shorter development cycle times are allowing us to engage in more opportunities.
in industrial and medical
Our momentum on the design-win front continued to build.
Fueled by a healthy stream of new products.
and an improved go-to-market strategy.
Our new customer-friendly website.
Speaker Change: is generating more opportunities and helping us to convert more of those opportunities into wins.
Speaker Change: In the data center computing market, we accelerated our technology roadmap in 2024.
Speaker Change: This acceleration is tied to the increasing rack power requirements of each new generation of AI data centers.
Speaker Change: We are working more closely with customers to develop technology which meets not just the needs of their next generation of products
but also the generation after that.
Key factors in our data center success.
are the ability to move fast.
Speaker Change: as well as deep expertise in the design and manufacturing of highly reliable products with industry-leading power density and efficiency.
and Operations.
Speaker Change: We made significant progress on our 15 to 5 factory consolidation plan.
Speaker Change: A key part of our goal to move gross margin above 40%.
On the M&A front, we acquired Arity.
Speaker Change: which brought critical GaN-based high voltage power technology and expertise to AE.
We are delighted with the acquisition.
Speaker Change: and have already integrated ARIDI technology into some of our flagship products.
Now I'll provide more color on the fourth quarter.
In Semiconductor, fourth quarter revenue increased 15% sequentially.
Speaker Change: well ahead of plan as we experience stronger year-end demand across multiple customers.
New product shipments were strong.
Speaker Change: driven by evaluation and qualification activity for EVOS, Everest, and Navex products.
at Semicon Korea next week.
We will launch another leadership product.
Speaker Change: A matchless RF delivery system based on the Everest modular architecture.
This new product, called EVOLVE,
offers millisecond tuning
multi-level pulsing, a small footprint, and no moving parts.
We shipped Evolve qualification units in December.
Speaker Change: and expect the technology to drive further gains for AE in both deposition and edge.
and Data Center Computing.
Fourth quarter revenue grew 10% sequentially.
driven by strength and hyperscale.
Speaker Change: This was a record quarter for data center computing product revenue, and we see continued strong demand moving into 2025.
Thank you.
as customers and distributors.
continue to work down inventories.
Industrial and medical new product and design activity was robust.
Speaker Change: We launched 12 new I&M products including a number of configurable power supplies.
We want new designs in test and measurement.
Industrial Production
Electrosurgery
and Aerospace and Defense.
Speaker Change: In the fourth quarter, we launched a new program with Sager, one of our largest distributors.
to ensure speedy delivery of fully configured prototypes.
Now I'd like to touch on our outlook for 2025.
Speaker Change: We believe that our full year 2025 semiconductor revenue will grow faster than market.
Speaker Change: due largely to initial new product ramps in the second half.
We expect data center demand to remain robust in 2025.
based on projected AI investments.
as well as customer adoption of our high-value solutions.
and the industrial medical market.
We believe that we are close to a bottom.
I'd like to close by touching on our 2025 priorities.
First.
Speaker Change: We will maintain our strong new product and design wind momentum.
We continue to invest heavily in R&D and go-to-market initiatives.
Speaker Change: and expect those investments to drive increased share as market conditions improve.
Second.
We will largely complete our factory consolidation plan.
Finally
Speaker Change: We plan to use our strong balance sheet to pursue strategic acquisitions.
which will accelerate our growth in industrial and medical.
and broaden our technology portfolio.
Speaker Change: At our recent Analyst Day event, we outlined a 2030 Target Model.
Which calls for doubling our revenue
increasing earnings by four times
and expanding gross margin to 43 percent.
with a diverse set of attractive end markets.
Strong customer relationships
Speaker Change: Best-in-class technology and a highly capable factory network, we have high confidence in our ability to achieve those long-term goals.
Paul will now provide more detailed financial information.
Thank you, Steve, and good afternoon, everyone.
Speaker Change: In the fourth quarter, we executed well to deliver both revenue and earnings above our guidance.
Speaker Change: Upside in the semiconductor and data center computing markets more than offset ongoing sluggishness in industrial and medical.
Speaker Change: We continued to execute our manufacturing cost improvement initiatives and delivered gross margin at 38%, the third consecutive quarter of sequential increase.
Speaker Change: Lastly, cash flow from operations was 83 million dollars, just below last year's record Q4.
Speaker Change: Overall, despite a challenging start to 2024 and an ongoing inventory correction in the industrial and medical market, we finished the year on a strong note, delivering Q4 year-over-year growth in revenue, gross margin, and earnings.
Now let's review our financial results in more detail.
Speaker Change: Fourth quarter total revenue of $415 million increased 11% sequentially and 3% year-over-year.
Speaker Change: Semiconductor revenue was 227 million dollars, up 15 percent from Q3 and 19 percent from last year, with growth across products and service.
Speaker Change: We were pleased with our ability to respond quickly and capture additional year-end upside.
Speaker Change: Channel inventories continued to be above target levels as markets conditions remain soft.
Speaker Change: Data Center computing revenue was $89 million, up 10% sequentially, and 41% year-over-year.
Speaker Change: Demand strengthened again as we started production ramps of new high-power products.
Speaker Change: Excluding the revenue from premium recoveries during the supply chain crisis, data center product revenue reached a new record.
Speaker Change: Telecom and networking revenue was 23 million dollars down year-over-year but up 20% sequentially as we ramped production of a new program that was pushed out from Q3.
Speaker Change: Fourth quarter gross margin was 38%, up 170 basis points sequentially due to higher volume, favorable product mix, and improved manufacturing efficiency.
Speaker Change: Gross margins in Q4 2024 were roughly 200 basis points higher than 2023 levels at a similar revenue run rate as we are seeing the initial benefits of our gross margin improvement initiatives and improved mix take effect.
Speaker Change: Operating expenses were $102 million, up 5% from last quarter, driven largely by higher sales and incentive-related expenses, and timing of a few items that we do not expect to repeat in Q1.
Speaker Change: Operating margin for the quarter was thirteen and a half percent, up 300 basis points from last quarter and 120 basis points from last year, demonstrating the margin leverage of our model.
Speaker Change: Depreciation for the quarter was 11 million dollars and our adjusted EBITDA was 67 million.
Speaker Change: Other income was 1.5 million dollars down as expected from Q3 on lower cash balances and interest earnings following the prepayment of our 345 million dollar term loan in late Q3.
Speaker Change: Our non-gap tax rate for the quarter was 14.3% on favorable year-end discrete items.
Speaker Change: As a result, fourth quarter earnings were $1.30 per share, up from $0.98 per share in the previous quarter and $1.24 a year ago.
Turning now to the balance sheet.
Speaker Change: Total cash increased by $65 million to $722 million, with net cash of $157 million.
Speaker Change: Inventory days came down to 126 in Q4 from 143 in Q3 and inventory turns improved to 2.9 times.
Speaker Change: DSO decreased to 57 days from 62 days largely due to timing of revenue and DPO remained flat at 50 days.
Speaker Change: As a result, networking capital decreased sequentially from 155 to 133 days.
Speaker Change: During the quarter, we invested $13 million in CapEx and paid $4 million in dividends.
Speaker Change: Before I move on to guidance, let me briefly review our four-year results.
Speaker Change: In 2024, we delivered revenue of $1.48 billion, down 10% year-over-year in a challenging market environment.
Speaker Change: The decline was driven by lower revenue in both the industrial, medical, and telecom networking markets, which were down 33% and 53% respectively.
Speaker Change: On the other hand, semiconductor revenue grew 7% from the trough in 2023 and achieved its highest level in two years in the fourth quarter.
Speaker Change: During 2024, we focused on positioning ourselves for faster earnings growth as markets recover. We reduced both fixed and variable costs and accelerated actions to optimize our manufacturing footprint.
Speaker Change: As a result, despite lower revenues in 2024, our non-GAAP gross margin was up 20 basis points year-over-year, and we exited the year at the highest gross margin since Q2 of 2021.
Speaker Change: This investment was more than offset by lower SG&A as we drove actions to improve efficiency and scale.
Speaker Change: As a result, full year 2024 non-GAAP earnings were $3.71 per share, and our adjusted EBITDA was $193 million.
2024 CapEx was $57 million or 3.8% of revenue.
Speaker Change: We expect 2025 CapEx to run at or above these levels as we invest in ramping several new platforms and execute our plan to scale the company to support long-term growth.
Speaker Change: However, longer term, CAPEX should normalize back to historical levels as we complete these investments.
Turning now to our guidance.
Speaker Change: We expect Q1 revenue to be approximately $392 million, plus or minus $20 million.
Speaker Change: The sequential change is mostly driven by the outperformance in semiconductor and data center in Q4, as well as seasonal factors that we discussed on our last call.
Speaker Change: While lower than Q4, our Q1 guidance is substantially above last year and higher than previous expectations.
Speaker Change: We expect Q1 gross margin to be approximately 37 to 37 and a half percent down slightly quarter over quarter on lower volume
Speaker Change: We're pleased with our improvement in gross margin over the past several quarters and expect to see additional improvements in the second half as we complete the product transfer process and close our China factory by mid-year.
Speaker Change: We expect operating expenses to come down to $98 million to $100 million on sequentially lower sales-related costs and timing of expenses from year-end, partially offset by ongoing investments in R&D and other critical programs.
Speaker Change: We expect Q1 Other Income to remain in the $1 to $2 million range.
Speaker Change: As a result, we expect Q1 non-GAAP earnings to be $1.03 per share, plus or minus $0.25.
Let me provide some concluding comments.
Speaker Change: Looking back at 2024, we're encouraged by the progress we made in executing our strategy.
Speaker Change: including delivering a record number of new products, capturing new design wins across our markets, improving gross margins, and growing our cash position.
Looking forward to 2025, we're excited about the opportunities ahead.
Speaker Change: While the market environment continues to be mixed with limited visibility to the second half, we believe ongoing progress on our strategic initiatives will define our future.
Speaker Change: and position us for outsized growth in revenue and earnings over time.
Speaker Change: We're driving adoption of our next-generation semiconductor platforms to grow share, leveraging design wins and channel investment to capitalize as the industrial and medical market recovers, and maximizing high-end opportunities in AI-driven, high-powered data center applications.
Speaker Change: Executing a factory consolidation plan will allow us to further lower manufacturing cost, enable scale, and achieve our gross margin goals.
Speaker Change: Finally, our strong balance sheet and cash flow give us ample capacity to make strategic acquisitions to add scope and expand our market position.
With that, Operator, we'll take your questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker Change: And the first question comes from the line of Brian Chin with Stiefel. Please proceed with your question.
Brian Chin: Hi there. Good afternoon. Thanks. Congratulations and thanks for letting us ask a few questions.
Brian Chin: First question, thinking about sort of the first half versus second half last year commentary. I think that might put semi equipment maybe in the vicinity of sort of 10% year-over-year growth.
Brian Chin: And I know you talked about the potential to outgrow WFE, I recall, from earlier in the prepared remarks. And so is that 10% year over year, even with an acceleration in the back half, as you suggested, is that maybe the right frame of reference in terms of the outperformance?
Brian Chin: Hey Brian, this is Steve. What we said basically is we...
Speaker Change: We were able to take advantage of opportunities in Q4 to really maximize the revenue in Semiconductor. So there were two real highlights in Q4. One was their Semiconductor revenue and the second was the data center revenue.
Speaker Change: As we move into Q1, we're seeing the semiconductor demand moderate a bit.
Speaker Change: and again that's after a record Q4. As we move forward in the year of 2025, you know, we haven't given a specific guidance.
Speaker Change: But we think the second half is better than the first half, largely because many of our new products are beginning to ramp the volume in the second half.
Speaker Change: And that's what's driving our confidence and our ability to outperform the market in 2025.
Speaker Change: Okay, maybe just to drill down at one level, clearly some of your new design wins for EVOS.
Speaker Change: and other next-gen supplies and matches should layer in over time.
Speaker Change: side to future technology transitions and equipment platforms. But can you clarify or confirm whether some of your early designs are closely aligned with the NAND market? Where there clearly is some pickup and upgrade activity that's very etched and deposition focused.
Speaker Change: How do you see that contributing maybe to your equipment outlook this year?
Speaker Change: Yeah, it's interesting because what we're finding is, you know, we've shipped over 250 of these evaluation units in Everest, Evos.
Speaker Change: and NAVX and that was through December of last year and obviously the demand continues into this year. But they're finding homes across all leading-edge processes and the issue is customers
Speaker Change: using the older technology just can't get the job done, right? They're losing throughput and they're losing yield based on old technologies. So that's forcing them to move to our new technologies.
Speaker Change: And that's the same challenge whether you're talking about NAND, DRAM, or leading edge logic. So we're seeing equal interest from all segments in those technologies.
Speaker Change: Okay, got it. That's all for me. If I could just ask one more question. It's actually kind of financial related.
Speaker Change: There's clearly been a lot of talk and reporting about broader weakness in industrial. This isn't so much on your revenue side but actually in terms of gross margins.
Speaker Change: I think semi-cap companies tend to be classified as industrial markets for chip companies. And so do you actually feel pretty good about the cost point and availability of chips you buy?
Speaker Change: and integrate into your power subsystems. Are there opportunities to actually lock in favorable pricing and supply that supports your gross margin expansion targets?
Speaker Change: That's a great question. It's an issue we deal with every day practically, and I would say it's hard to give a general answer.
I think, uh...
Speaker Change: You know looking back over the last three or four years
Speaker Change: We've divided our suppliers into two camps. One are the suppliers that supported us well during the shortages, and the other camp is the suppliers that didn't support us very well at all.
Speaker Change: You know, I think we've we've basically focused more business with suppliers who have shown the degree of support we're going to need over time
Speaker Change: Now, when it comes to pricing, you know, I think there are market forces at work, and certainly speaking generally, we see prices coming down, but the willingness to engage in price discussions varies from supplier to supplier.
Speaker Change: But obviously it's a, you know, it's a positive for us if the supplier is willing to move on price to keep us more competitive.
Okay, great. Thank you.
Speaker Change: Yeah, Brian, I'd just add on to that. I think at this point, it's a little too early, you know, as we think about our gross margins plan to count on, I'll say, material improvements.
Speaker Change: As Steve said, there's a lot of discussions, and as you know, material costs are up, excluding premiums, they're up from where they've been historically. So this is an area we're working on and could potentially be a tailwind to gross margins over the year, but I think it's a little early to bake that in.
Okay, thanks Paul. Yep.
Speaker Change: And the next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.
Krish Sankar: Hi, thanks for taking my question. Steve, first on the traction you're seeing on Evos and Everest, I'm curious, like, you know, you said it's across all markets.
Krish Sankar: Specifically on the edge side, where are you seeing more traction? Is it on the conductive edge or is it more on the dielectric edge where you're seeing more traction? And then I will follow up.
Steve Kelley: Yeah, we're seeing traction in both areas because you have similar challenges. I mean, the basic challenge we're seeing, whether it's conductor or dielectric, is the ability to drill deep holes.
Steve Kelley: with minimum damage to the wafer. So it gets to throughput and yield. And so what these technologies allow our customers to do...
is to increase their etch rate.
Steve Kelley: and to lower the defect rate as they implement these new leading-edge processes.
Steve Kelley: And so, I would say, in general, we've seen strong interest from both conductor etch and dielectric etch applications.
Speaker Change: I mean is one better than the other or they kind of similar between conductor and dielectric?
Speaker Change: No, I think the difference really is power levels, so when the conductor wrench doesn't require the same power level we see in dielectric, but it's the same basic technique that we bring to our customers.
Speaker Change: Gotcha. And then a quick follow-up, you know, you kind of mentioned about strength in the second half and semis. I'm kind of curious, what gives you the confidence? Is it more, I mean, I'm assuming you don't have the visibility, but is it more just the design-win-traction pipeline or something else that's going on?
Speaker Change: Yeah, Chris, it's really design wins. You know, we've had so much activity across our customer base over the last year and a half.
Speaker Change: that we think some of this is going to start bubbling up into revenue in the second half this year. So that's what gives us the confidence. You know, I think the only statement we've made is we think we can grow faster than market. We don't know exactly what the market's going to be in the second half.
Speaker Change: But what gives us that confidence is our new products, plus the fact that the etch and depth intensity for these leading-edge processes continues to increase.
Fair enough. Thanks to that, Steve. Thank you very much.
Speaker Change: And the next question comes from the line of Rob Mason with Baird. Please proceed with your question.
Hello Rob, your line is now live.
Speaker Change: Okay, the next question comes from the line of Scott Graham with CPD.
President of the U.S. Department of State."
Hey, good afternoon. Congratulations on a terrific quarter.
Speaker Change: I wanted to understand your thinking around the shared gains you've spelled out, the Y's, the three big products. I'm just curious if you're thinking kind of like more second-half oriented which I think the entire market is on SEMI, would the shared gains be more pronounced in the second half than the first as a result?
Speaker Change: Yeah, I think you're referring to semiconductor in particular, right, on the shear gains? Yeah, I thought I said that, but I didn't. Yes. Yeah, okay.
Speaker Change: That takes time, right, because there's a lot of puts and takes as you go through a year.
And I think...
We commented on
Speaker Change: Initial ramps of our new product in the second half. That's really what gives us confidence that we can grow the second half of the first half in semiconductor.
Speaker Change: I think what you'll see is our market share will increase over the coming 3 to 5 years.
Speaker Change: They're across the board in plasma processes for semiconductor, based on the strength of these EVOS and Everest technologies. But it's going to take some time to materialize. That's just the nature of market share in semiconductor.
Speaker Change: Understood, thank you. I've got two other questions if I may. The industrial and you know medical, that's been a very difficult business for you throughout the year and it didn't look like it improved that much in the fourth quarter.
Good for you now.
Speaker Change: Yeah, it's kind of a tough question to answer because we don't have perfect visibility. But I think one way to think about it is, if you look at the industrial and medical market historically, you don't see the magnitude of change we've seen this year. And it might be more...
Speaker Change: You know in the five to ten percent range depending on the economic conditions or what's happening We've seen much bigger gyrations than than that and if you listen to us And you know many of our peers and customers you could say that it's down thirty to fifty percent depending on who you are We're probably on the better side of that
Speaker Change: extended lead times and caused people to buy, you know, inventory based on those lead times. Now that those lead times have collapsed, they're working through that, that inventory. So it's hard to handicap, but I think you can look at some historical levels to get, to get some perspective on it.
okay yeah and maybe just a few more comments
You know, we think we're...
Speaker Change: We're just about through the corrections because this is our sixth quarter of correction in industrial medical.
Speaker Change: And so, what we've done over the past year and a half is redouble our efforts in that area to increase our design wind funnel and to really set us up to gain market share as the industrial medical market recovers.
Speaker Change: And we think that's going to happen, start happening this year, and we think when we come out into 26, we're going to have a higher market share than we did.
last year in industrial medical.
Speaker Change: Okay, just the last one, I hope you don't mind my sneaking in, is that, you know, we've been waiting on an acquisition in I&M for some time, we went to
the debt markets.
Speaker Change: almost, I guess it was like five quarters ago, and I think you've been waiting on an opportunity as well. Is it that those businesses just need more critical mass?
Speaker Change: I'm thinking that the answer to that is no, because you're in so many different areas. But what is your perspective on that? Is it a critical mass thing? Because.
I know you're saying that you're...
Your peers are down 30 to 50.
Speaker Change: I'm not seeing those numbers, so I was just kind of wondering...
Speaker Change: From that perspective, is it possibly also a critical mass thing?
Speaker Change: Yeah, maybe just comment on the industrial medical market, because I think I'll answer your question maybe in an indirect way. Industrial medical market...
Basically, it's very sticky.
Speaker Change: And so right now, it's a very fragmented and sticky market. And so we can win an outsized number of new designs and still not move the needle as much as we would like. So that's why we're pursuing M&A in the industrial medical space. It's to build up further critical mass, become more important to our customers essentially.
Speaker Change: Now, the only hurdle to buying companies right now is valuation.
Speaker Change: So we're clearly in the hunting mode. We've got a good pipeline of candidates.
and I think...
Speaker Change: With the passage of time, I think some of our targets should become more realistic on valuation, and at that point we could do a deal.
That's great. Thanks a lot for your time.
You're welcome.
Speaker Change: And the next question comes from the line of James Rischuti with Needham and Company. Please proceed with your question.
Speaker Change: Hi, thanks. Paul, you may have mentioned this, but on the sequential improvement and gross margin, were you able, or did you attribute, quantify how much of that came from the facilities consolidation actions, or maybe you could just say...
Speaker Change: Give us a sense as to how much of an impact that might have had it sounds like it was mixed mainly but
Speaker Change: I actually think it's a combination. Obviously we saw improvement in Q3 from the facility. We saw further improvement on the facility side from in in Q4.
and we got a little bit of help from Nick.
Speaker Change: I think if you look at how we think about the contributors to gross margin improvement, of course the one that's most in our control is the facility cost reduction. We believe we're on track there and we talked about 200 to 250 basis points of improvement related to that.
Speaker Change: I think broadly speaking, we've achieved at least half of that already to date, maybe a little bit more. And the next leg of improvement comes...
Speaker Change: in the second half of this year as we complete our closure of our China facility. So I think we're well on the way and we feel very good about our progress there.
Speaker Change: I think MIX is helping us a little bit, obviously we had just some better product mix this last quarter, but one of the elements of MIX that's helping us is that our mix in data centers is actually better. We've talked about continuing to improve gross margins.
in that market as we focused on more differentiated solutions.
Speaker Change: And so while that market's performing well, it's not, you know, nearly the drag it's been historically. And on a year-over-year basis, we certainly saw, you know, I'll say net improvement in margins, which we would attribute, you know, to mix.
in that regard. And then lastly, we're pleased that...
Speaker Change: The improvement from margin is tracking right on our model of, you know...
Speaker Change: Roughly 100 basis points of improvement for every $50 million of quarterly revenue.
Speaker Change: Exit this year and more pronounced perhaps in 2026, but we feel very good about the gross margin progress across the key elements.
Speaker Change: Got it. And if I follow up just on the two areas of the...
Speaker Change: a non-semi-business that I think everybody's been focusing on. You guys do sound a little bit more optimistic about the continued strength in data centers. Is that a fair way to characterize it? And, you know, in terms of your line of sight when you talk about demand remaining fairly robust through the year,
Speaker Change: How much of a change is that versus a few months ago?
Thanks.
on what you're talking, you know, talking to customers.
Speaker Change: Yeah, I think you're right, Jim. We have changed our position on data center. We've become more positive since the last earnings call based on what's in front of us, what we're hearing from our customers.
Speaker Change: and also what they're saying in public you know I think there's gonna be a lot of money spent on data center this year into next and we're in a very good position to continue to to grow that business over the course of 2025
Speaker Change: Yeah, and Jim maybe I'll add you know if you kind of look if you kind of look at our guidance
Jim: and the comments earlier, we are more optimistic on 2025. We would expect the data center market to grow and for us to grow with that.
Jim: When you look at what we've said across our other markets, within SEMI, we will grow faster than the market. The market, we think, our operating assumption is flattish if you look at WFE, so new products will help us grow faster than that.
Jim: and industrial and medical while you know we think we're bottoming right now there will clearly be some recovery in that market this year as early as the end of Q2.
Jim: When you put that all together, we think the full year is going to be up high single digits and obviously data center is a part of that.
That's helpful. Thank you.
Oh yes, good afternoon. Can you hear me?
Hey Rob
Thanks.
Yeah, sorry about that.
Just wanted to, Steve, I mean...
Speaker Change: Could you talk about any, is there any distinction between what you're seeing in the industrial versus medical, just in terms of the underlying demand and the, maybe the willingness or rate pace at which some of these design wins that you've locked down.
you know, can start to move into production.
Speaker Change: I think most of my comments apply equally to industrial medical. I would say the big difference between the two is that our medical revenue tends to be concentrated in some large customers.
Speaker Change: and those large customers, many of them are working through inventory issues.
Speaker Change: But the demand in medical, the inputs we're getting from our customers, the demand is picking up. And that's encouraging for their ability to eat through the inventories they currently have and to start placing orders again.
Speaker Change: I think an industrial, you know, it's a wide variety of customers, some big ones, some small ones, a lot of medium-sized customers. And so it's a...
Speaker Change: You know, it's a very broad market. Thousands of customers, literally. So I think the ability for that market to recover is probably a little bit better just because it's so broad.
Yeah, yeah.
Speaker Change: As a follow up, I don't think this has come up yet, but it was just, you know, could you address
Speaker Change: Obviously, you're exiting China, but in my understanding, within Mexico, a lot of those products don't necessarily ship directly to the U.S. They may go to Mexico.
Speaker Change: elsewhere, maybe stay within Mexico, but you know, to the extent your customers have, you know, to deal with that, you know, are you seeing any need to move where you ship and hence maybe where you produce? Or is that part of the conversation?
Speaker Change: Yeah, let me make a few general comments on that, and I'll turn it over to Paul to make some other additional comments. But, you know, I think there are basically two areas that we look at. One is our manufacturing footprint.
Speaker Change: and the second is our supply chain. So from a footprint standpoint, we started pivoting out of China several years ago and we'll be out of China from a manufacturing standpoint by June of this year. So that's a checkmark.
The second issue is Mexicali.
Speaker Change: So the first thing to understand about Mexicali is it represents less than 10% of our revenue. And you're right, most shipments are to non-U.S. locations.
Speaker Change: That said, you know, we still have shipments coming into the U.S., so, you know, we're looking for ways to to mitigate any potential tariffs, and ultimately, if we can't mitigate it, then we can build these products in other factories in Southeast Asia. So there's nothing magical about that.
Speaker Change: From a supply chain standpoint, we've had a multi-year effort to reduce dependence on Chinese suppliers, and that's also motivated by some of our customers making that request.
Speaker Change: Yeah, the only thing I'd add to that is it's a pretty fluid situation.
Steve Kelley: As Steve said, I think we have mitigating strategies relative to supply chain and logistics.
Steve Kelley: and quite possibly pricing. So we'll monitor the situation. Obviously, we're learning more about it. To be clear, there's nothing embedded in our guidance related to tariffs at this point, given that it's a pretty new and fluid issue. But again, I think on balance...
Steve Kelley: It shouldn't be a large impact and there's a variety of strategies to mitigate that impact for us.
Understood. Thank you.
Mm-hmm.
Speaker Change: And the next question comes from the line of Joe Quattrocki with Wells Fargo. Please proceed with your question.
Joe Quattrocki: Yeah, thanks for taking the questions. On the SEMI side, just trying to understand the commentary for 2025.
Speaker Change: You know your base case is kind of thinking that the WFE is relatively flat and you should outgrow that just given the new product launches in the second half. I guess are you seeing customers add any sort of kind of
Speaker Change: additional inventory after kind of working down the upper inventory over the last you know several quarters and then I guess can you remind us on the new products that you're launching is there any sort of ASP dynamics that we should think about you know relative to the prior generation products
Steve Kelley: Yeah, this is Steve. I'll make a few comments and Paul will chime in. You know, it's hard to make comments about...
Speaker Change: what our customers are doing. They don't always tell exactly where the products are going. We don't, we don't know. But all we know is that demand was, was good. You know, we saw growth last year and Q4 was our best quarter since Q4 of 22. So we're pretty happy with that.
Speaker Change: You know, we think we're at a point now where the purchases from our customer are pretty close to what they need near term. So I don't think we're dealing with that many inventory issues.
Speaker Change: What was your second question? I'm sorry. Yeah, just trying to understand, you know, as you think about the growth drivers, the ASP dynamic for EVOS, Everest, etc. Just, is that a higher ASP than the prior generation product? I think about embedding that in your line of sight to revenue growth.
Speaker Change: Yes, in general the new products bring more value to the customer, they're more capable and they have a higher price tag.
Speaker Change: On the industrial medical side, I think last quarter you talked about normalizing channel late for Q early this quarter. It sounds like maybe that's kind of pushed out. Is that the right way to think about it? And then what gives you confidence that, you know, we are at the bottom?
Yeah, you know, I think...
Speaker Change: What we said was there's a potential, you know, for us to start recovering in Q2 of this year.
So yes, I think our
Speaker Change: statement moved out a quarter. What gives us confidence in that is that you know we've seen the deceleration in the business slow down and so when you look at what happened in 2024 basically every every quarter Industrial Medical was down from the previous quarter.
Speaker Change: until Q4. In Q4 it was basically flat to Q3. And so that's why Paul said we think we're bottoming.
Speaker Change: And at some point, you know, we think we're going to start recovering that business. The other part that's important is to realize that half of our business in industrial medical goes through distribution.
Speaker Change: And so we've had three quarters now where the cell into distribution has been less than the cell through.
Speaker Change: And so that's brought our inventory down steadily in the distribution channel. And I think that's one of the better indicators we have that, you know, we're about to turn upward again. But it's always difficult to time it precisely.
Got it. Thank you.
Steve Barger: And the next question comes from the line of Steve Barger with KeyBank Capital Markets. Please proceed with your question.
Thanks. Good evening.
Steve, thinking about getting to outgrowth or share gains.
Speaker Change: Back in October, you talked about a 30% conversion rate from funnel to design wins. Does it feel like there's been any change in either the rate of additions to the funnel or maybe your win rate post-election or post-inauguration?
Speaker Change: So over the course of 24 the pipeline increased by about 20% in dollar terms
Speaker Change: And our conversion rate is still strong, 30 to 35 percent, that's the right ballpark. I think probably where we're falling short is the conversion of design wins into revenue.
Speaker Change: And so, you know, I think that's probably a function of the market. Our customers work in through inventory before they focus on, you know, some of the new products. So I think that, you know, with time, those wins will turn into revenue, and that's why I think as the market turns.
Speaker Change: You know, we're going to gain in an outsized way as the market recovers in industrial medical.
So when you have a design when do you basically
Speaker Change: the bank and it's just timing until that does convert or do you ever have a design wind Go stale?
Thank you for your time, sir.
Speaker Change: Oh yeah, we have a lot of design wins that go stale, but then we have some that outperform.
Speaker Change: and some where the timing either gets pulled in or pushed out.
Speaker Change: And so, what we do to qualify DesignWind, we need significant order from the customer and not just a statement that they've designed this in. So I think the DesignWinds are legitimate.
Speaker Change: But, sometimes, you know, the customer may not be successful in their market, or there may be some other extraneous factors that constrain the wind from turning into revenue.
Speaker Change: Got it. And Paul, when you were answering a data center question earlier, I think you said you expect full-year revenue for the company to be up high single digit. So first, did I hear that correctly? And then if I did, when you think about that growth in the context of your own margin initiatives, how are you thinking about operating leverage for the year?
Speaker Change: Yeah, and first I did, that is what I said is if you take the sum of our comments by market it implies high single digit growth for the company, so you did hear that correctly.
Speaker Change: And I think what you're poking at, if the data center is growing faster, faster than the other markets, how does that imply our margins implications? The way we've looked at it, and I think I've commented on this in the past, is that we've been able to close the gap.
Speaker Change: in data center relative to the company average. So it doesn't average the company up, but the gap is lower. And as we've done our modeling, we've kind of said that, you know, a mix in any given quarter can impact this, you know, up to 50 basis points.
The Manufacturing Costs Take Down
and these other things that we're driving.
Speaker Change: We believe we can still get to our gross margin objectives even if data center is stronger than the other markets in the coming year.
Speaker Change: got it that's that's great color well and I guess to that point I mean you've always talked about incremental operating contribution margin in the I think 40 mid 40s like so you would expect the same
Speaker Change: Yeah that's right our long-term model is for operating margins is 35 to 45 percent and so yeah we're saying in this window that we would expect to see that same that same level of operating margin leverage.
Speaker Change: Right, and if I can just think in a quick modeling question, from your comments it sounds like you expect another year over year decline for industrial medical in one cue, but do you think revenue could be up sequentially from kind of the 78 million you've averaged over the last three quarters?
Speaker Change: Yeah, I don't think we were that specific. I think we said it's bottoming.
Speaker Change: You know, so we would characterize it as bouncing along the bottom here. And we said that we could see, you know, revenue growth as early as Q2. So again, that's a little hard to handicap, but that's how we think about it. And I think that would imply a stronger second half than a first half in any regard in industrial Medicare.
Okay, thanks.
Yep.
Speaker Change: And ladies and gentlemen, if you would like to ask a question, remember it is star 1 on the telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove yourself from the queue. One moment please while we poll for additional questions.
Speaker Change: And the next question comes from the line of Mehdi Hassani with Susquehanna. Please proceed.
Speaker Change: Hi, this is May Wishmabob asking on behalf of Mehdi Hosseini, thank you for taking my questions.
Speaker Change: My first question is regarding OPEX. Can you offer some color on your OPEX growth for 2025 relative to your anticipated revenue growth for the year, as well as against your 2024 OPEX?
Speaker Change: and second is the pickup in your semi business reflecting an inventory refresh by your OEM customers or is it more reflection of material growth across the OEMs in anticipation of their own revenue growth and then I have a quick follow-up
Speaker Change: Yeah, thanks for asking the question. On OPEX, OPEX was up a little bit in the fourth quarter, basically on higher volumes and incentive-related.
Speaker Change: So we expect that to revert back in the first quarter.
Speaker Change: down into the $98 to $100 million range. As you look forward into the year, we do expect to see that number grow sequentially over time. We've talked about it growing kind of in the $1.5 to $2 million range per quarter.
Speaker Change: As we implement salary changes, there's inflation, clearly we're going to continue to invest in all these new product launches and we see...
Speaker Change: Great. And then regarding the semi-business, you know, do you see that more, do you see that reflecting more the inventory refresh from your OEMs or is that, you know, just more growth across OEMs anticipation of their own revenue growth? If any color there would be really appreciated.
Speaker Change: Yeah, we really don't know. I think there's a variety of reasons we outperformed.
Speaker Change: Fourth quarter, you know some customers. I'm sure we're refreshing inventory, but we think most of demand was
was there to match the demand from our customers.
Speaker Change: So, we think we've reached an equilibrium point in semiconductor after...
Speaker Change: after a couple of years of adjustment. So we're pretty happy where we're at from a demand standpoint. Again, this is the best quarter we've had in semis since Q4.
of 2022.
Yeah, I think we're well positioned.
Speaker Change: Great, thank you, that's very helpful. And lastly, just any color you can offer on trends you're seeing within your networking business. Thank you.
Speaker Change: And so what we see there today is it's a pretty flat business for us now.
Speaker Change: We don't see a lot of growth moving forward. So most of the action today is going to be in semiconductor, in data center, and in industrial medical. Intellicom and networking is fine, but it's not a growth business for us.
Got it. Thank you.
Speaker Change: And ladies and gentlemen, that does conclude the question and answer session. That also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.