Advanced Energy Industries, Inc.

Today's call contains four looking statements. They are subject to risks and uncertainties that cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filing. All four looking statements are based on management estimates as of today, August 4th, 2021, and the company assumes no obligation to update them. Medium and long-term targets present today should not be interpreted as guidance. On today's call, our financial results will be presented on a non-GAAP financial basis unless otherwise specified. Excluded from non-GAAP results are amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains or losses, and restructuring items. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelly. Thank you, Edwin.

Good morning, everyone, and thanks for joining the call today. Second quarter revenue and earnings per share met the midpoint of our guidance. Demand remains very strong, and we've recorded significant new design wins in all of our target markets. As forecasted, our second quarter revenue was limited by shortages of integrated circuits and other key components. Additionally, late in the quarter, Output from our Malaysia factory was constrained due to COVID restrictions. Component shortages will continue to limit our revenue into the third quarter, but we expect a healthy recovery beginning in Q4 as supply improves. Near term, our number one priority is resolving these supply constraints. COVID restrictions also remain a concern, but the vaccination of our employees in Malaysia this quarter should mitigate much of that risk moving forward. As we deal with these supply issues, it's important to note that our order book is very strong, which sets us up very well for revenue growth well into 2022 as constraints ease and we are able to bring supply more in line with demand. During the quarter, customer demand across all of our markets continued to grow. In the semiconductor market, the demand for our plasma power products strengthened as the industry continues to invest heavily in new capacity. After setting a record for sales into this market in the first half of 2021, we expect second half sales to be even stronger. And as supply constraints ease, we expect robust revenue growth in 2022. In the industrial medical markets, we saw increased demand across a wide variety of applications as macro conditions improved. In medical, we benefited from an uptick in elective care procedures. In the industrial market, we saw strength in flat panel displays, industrial automation, 3D printing, and industrial coatings. We also saw stronger demand in horticulture, solar, and battery applications. These demand trends should continue into the second half of the year. Data center computing demand also grew in the second quarter, and revenues from both hyperscale and enterprise customers were up sequentially. In addition, we shipped initial production units to a fourth hyperscale customer. Demand in the telecom market is improving, largely due to increasing 5G infrastructure investment in the US. Although second half revenues in both data center and telecom will continue to be paced by supply, we are winning new high value added designs in both markets. Now let me turn to our strategy and growth initiatives. Our ultimate objective is to drive sustainable increases in shareholder value through profitable revenue growth. We intend to achieve this growth by developing highly engineered proprietary power delivery systems. This approach leverages our core competencies, our technologies, and our manufacturing base. Technology leadership, customer intimacy, and operational excellence will be the key enablers of our success. To accelerate our growth, we are putting particular focus on the semiconductor, industrial, and medical markets. Customers in these markets build expensive, complex machines which need reliable sources of highly engineered precision power. And that's where Advanced Energy excels. We are expanding our product development capabilities in these target markets and focusing our sales and applications teams on leading customers in these markets. In our other markets, such as telecom, networking, and data center computing, the team will continue to develop highly differentiated solutions, which address our customers' most difficult power delivery challenges. We believe that this approach will drive sustainable and profitable growth. By focusing on differentiated solutions and long lifecycle applications, we are building a business which should grow steadily and deliver good profitability. And we have a strong starting position with proprietary products accounting for nearly three quarters of our current revenue. In semiconductor, we are seeing great traction with our new flagship products. Both the EVOS plasma power system and the Maxstream RPS solution are being evaluated by all of the leading OEMs. Additional customer feedback has been very encouraging. During the quarter, we acquired TGAM, an industry leader in RF instrumentation and calibration systems. TGAM's technology enables our plasma power customers to precisely quantify delivered RF power. This data is critical to the development of repeatable thin film manufacturing processes. The GAM also provides a platform to expand advanced energy service business. In the medical market, we won multiple designs in the second quarter in imaging, therapeutic, and life science applications. Winning in medical takes time, but the long product life cycles in this market ensure a steady stream of recurring revenue. In the industrial market, we had multiple design wins in the second quarter, including two new custom power solutions for industrial test systems. In addition, we recently launched a new family of programmable DC power supplies optimized for test and measurement applications. In the data center computing market, we secured multiple design wins by meeting the stringent power efficiency and density requirements of high performance computing and AI customers. In the telecom networking market, our focus on high performance infrastructure opportunities has already yielded several key design wins. One of those wins is on a 5G base station expected to be deployed by multiple carriers in the US. We secured a second win in the 5G space with a customized DC to DC converter featuring superior power density and efficiency. Finally, in July, we hired a new global sales leader, John Donoghue. John is a seasoned professional with extensive experience selling technology-based products around the world. He will strengthen our customer relationships and help to drive share gains in our target markets. In closing, our markets are healthy with very strong demand for advanced energy's differentiated solutions. Although the operating environment continues to be challenging, our order book is at an all-time high. As the component shortages abate, we expect to catch up to market demand, setting us up for a strong 2022. We continue to be on the lookout for inorganic growth opportunities which meet our strategic and financial criteria. Just in the past six months, we've made three tuck-in acquisitions which have enhanced our technology portfolio and market position. Finally, as we execute our growth strategy, We believe that the company is well positioned to meet or exceed our medium and long-term financial targets. Paul will now review our financial results and provide detailed guidance.

Thank you, Steve, and good morning, everyone. In the second quarter, we delivered revenue slightly above the midpoint of our guidance, despite a challenging operating environment. Total revenue of $361 million was up 6% year-over-year and 3% sequentially. We also generated record revenues in our plasma power products and in our service business. Customer demand remained very healthy again during the quarter, resulting in an order book which provides solid demand visibility into 2022. On the other hand, new COVID-related restrictions in Malaysia resulted in our factory idling for several days and further limited our capacity output for semiconductor products in June. In addition, shortages of critical parts continue to be a challenge across all our markets, limiting revenue upside. Cost pressures associated with the supply chain were worse than expected, resulting in Q2 gross margins below our target. Favorable discrete items in our tax rate largely offset these shortfalls this quarter, resulting in earnings of $1.25 per share. We expect the operating environment to remain challenging, particularly in the near term, Supply chain and pandemic-related restrictions continue to be very dynamic, with a few key suppliers and ongoing COVID risks in Malaysia being the most significant issues. While we have made some improvements, recent decommits and extended lead times are expected to have a meaningful impact on our Q3 outlook before improving in the fourth quarter. With respect to Malaysia, we are actively working to get our employees vaccinated and plan to leave additional production capacity in Shenzhen through the end of the year to mitigate the impact and enable a quick recovery. More broadly, we are working closely with both our suppliers and customers to optimize deliveries while maintaining capacity across our factory network to be able to respond quickly as supply improves. While these challenges will have a significant impact on our results in the near term, we remain confident in our ability to meet our medium and long-term strategic goals as the operating environment normalizes. Now let me discuss our Q2 results. Overall, demand continued to strengthen across our markets, which contributed to the greater than $125 million increase in our order book. Revenues were impacted to a varying degree by market based on parts availability. Semiconductor sales were $177 million, up 21% from last year and just off the record set in Q1. Demand further strengthened throughout the quarter, and our team overcame some of the COVID-related restrictions in Malaysia, resulting in record sales of our plasma power products. Without the impact of these restrictions late in the quarter, our semisales would have increased sequentially. Revenue from our industrial medical markets grew 6% sequentially and 17% from a year ago to $83 million. Our order book in I&M is particularly strong, giving us visibility to support revenue growth well into 2022. Data center computing revenue is $69 million, up 17% sequentially, with growth coming from both enterprise and hyperscale applications. Telecom and networking revenue was $32 million in the quarter, which was lower than expected due solely to material constraints. Non-GAAP gross margin for the quarter was 38%. The sequential decline was primarily due to less favorable mix and higher than expected logistics and supply chain costs. We also saw lower factory productivity exacerbated by the Malaysia restrictions. While we expect gross margins to come under additional pressure in the second half, we continue to be confident in our ability to meet our long-term gross margin goal of over 40% as the supply chain environment and related constraints improve. Non-GAAP operating expenses were $82.6 million, up about $3 million from last quarter and slightly above our expectations. The sequential change was due to planned increases in annual labor costs, the addition of TGAM, and higher customer and program spending. Operating margins for the quarter were 15.1%. Other expense was $1.9 million, including $1.1 million of interest expense and $480,000 of FX losses. We continue to expect other expense to be in the $1.5 to $2 million range going forward. Our non-GAAP tax rate Our non-GAAP tax expense was $4.7 million, or 8.9%, primarily on favorable discrete items, which will not repeat next quarter. Looking forward, we continue to expect the GAAP and non-GAAP tax rates to remain in the 15% range. Earnings for the quarter were $1.25 per share, up from $1.18 a year ago, but down from last quarter. Turning now to the balance sheet. we ended the second quarter with total cash of $510 million and a net cash of $196 million, up slightly from Q1. Operating cash flow was $34 million, or just under 10% of revenue. During the quarter, we invested $15 million in the acquisition of TGAM and paid $5.4 million in CapEx, $4.4 million towards our debt, and $3.9 million in dividend payments. In addition, during the quarter, we repurchased $6.5 million worth of stock at $90.34 a share. From a working capital perspective, our days of net working capital were about flat at 96 days. However, inventory increased by $49 million as we continued to acquire raw materials to support higher demand levels. Turns were 3.3 times. Although it may take a few quarters, we expect turns to rebound as critical part shortages abate and we are able to fully ship demand. Accounts payable rose to $207 million with associated DPO of 82 days, largely offsetting the increased level of inventory in the short term. Receivables rose slightly to $243 million and DSO was unchanged to 61 days. Today we announced that our board of directors increased our stock repurchase authorization to $200 million in support of our long-term opportunistic share repurchase strategy. Now let me turn to guidance. Overall demand continues to be strong, and our order book supports growth well into 2022. However, a more challenging supply chain environment, particularly around a few integrated circuit suppliers, and uncertainties related to COVID restrictions are expected to have a larger impact to our revenue levels in the near term. As a result, we expect Q3 revenues to be approximately $340 million, plus or minus $15 million. However, based on current parts projections, we expect revenues to rebound and grow modestly year over year in the fourth quarter, with second-half revenues approximately flat to first-half levels. we expect Q3 gross margin to be around 35% to 36% on lower volumes and higher supply chain costs, with the full impact of material and logistics costs being realized in the fourth quarter before improving early next year. Operating expenses should be about flat on slightly higher R&D and a full quarter of TGAM as we continue to invest in critical programs. As a result, we expect Q3 non-GAAP earnings per share to be 80 cents plus or minus 20 cents. Looking forward, we are encouraged about the increasing customer demand for our proprietary power solutions, strong order book, and the solid traction we are achieving in our strategic programs. We are taking multiple actions to mitigate the impact of supply chain and operating challenges while staying focused on delivering new products and next generation technologies to our customers. As the current operating environment improves, we believe that strong demand coupled with actions we are taking, will enable us to deliver solid revenue and earnings growth in 2022. With that, let's take your questions. Operator?