Advanced Energy Industries, Inc.

Good afternoon, everyone. Welcome to Advanced Energy's fourth quarter 2021 earnings conference call. With me today are Steve Kelly, our president and CEO, and Paul Odom, our executive rights person and CFO. If you have not seen our earnings press release, you can find it on our website at ir.advancedenergy.com. There, you also find the Q4 earnings presentations. Before I begin, I'd like to mention that we will be participating at several investor conferences in the coming months. Now, let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filing. All forward-looking statements are based on management's estimates as of today, February 9th, 2022, and the company assumed no obligation to update them. Medium and long-term targets presented 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 our non-GAAP results are stock compensation, amortization, acquisition-related costs, restructuring expenses, and unrealized foreign exchange gains or losses. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our president and CEO, Steve Kelly. Steve?

Thank you, Edwin. Good afternoon, everyone, and thanks for joining the call. We finished the year strong, with revenue of nearly $400 million in the fourth quarter, a new record for advanced energy. For the full year, we achieved revenue of $1.46 billion, also a record performance. Demand for our products is very strong, and we carried a more than $900 million backlog into 2022. We are also pleased with customer acceptance of our new products and technologies across a wide variety of applications. During 2021, we fine-tuned our growth strategy, clarified our product roadmaps, added senior management talent, and increased the operating tempo of the company. We successfully integrated two acquisitions, Versatile Power and TGAM, which brought valuable medical, sensing, and calibration expertise to Advanced Energy. Our short-term financial performance remains constrained by IC shortages. However, it's important to note that our engineering and marketing teams remain squarely focused on developing market-leading technologies and products, which will drive the long-term profitable growth of advanced energy. And our sales teams are focused on taking those new technologies and products to customers throughout the world. At our core, we are all about precision power technology leadership and delivering that technology in a way which adds value for our customers. Now I'll provide more color on our fourth quarter and full year performance. Fourth quarter revenue and earnings per share surpassed the high end of our guidance. We secured additional critical ICs, which enabled us to ship more product than originally anticipated. This ability to quickly turn incremental parts into product revenue stems from a decision we made last year to keep our factories fully staffed, even though component shortages were constraining output. This full staffing approach gives us the surge capacity we need to take advantage of unexpected or lumpy delivery of critical ICs. And it paid off for us in the fourth quarter. Moving to the supply chain challenges. The semiconductor supply chain remains dynamic. Most of the ICs we buy are built on mature process nodes. And that is where most of the industry-wide capacity constraints are. Many of our suppliers are working diligently to expand capacity, and most of that incremental capacity is scheduled to come online later this year or in early 2023. In addition, we are working closely with our customers to qualify alternative ICs with better availability. In summary, we expect that IC shortages will continue to be an issue for much of this year although we do expect improvement in the second half as new capacity comes online and our qualification and redesign efforts bear fruit. We continue to pay abnormally high prices to secure critical ICs in short supply. We also continue to experience unexpected supply decommits from certain IC suppliers. Given these factors, we are taking a prudent approach to our near-term outlook. Now I'd like to provide color on each of our target markets. Our fourth quarter shipments into the semiconductor market grew sequentially and year over year. For the full year, we achieved record revenue despite persistent supply issues. And over the past two years, our semiconductor revenue grew by 76%. In the first quarter of 2022, we expect to grow semiconductor revenue sequentially and year-over-year. At the Semicon West trade show in December, we launched three new products for the etch and deposition markets, which featured advanced control capabilities. Also in the fourth quarter, we won multiple new designs with our high voltage, critical sensing, and embedded power products. In the industrial medical market, our fourth quarter revenue was up sequentially, and year-over-year on improved component availability. In fact, fourth quarter as well as full-year revenue in this market hit an all-time high. We expect robust demand in the industrial medical market in 2022 and carried a substantial backlog into the first quarter. During the fourth quarter, we launched three new industrial and medical products. In addition, we secured design wins in medical, test and measurement, horticulture, and solar cell manufacturing applications. In the data center computing, telecom, and networking markets, fourth quarter revenues were well ahead of expectations due to improved component availability. During the quarter, we launched our next generation 48-volt PowerShelf, which features 97% efficiency and industry-leading power density. Our telecom revenue grew in the fourth quarter, largely due to increased demand for 5G infrastructure equipment. Now I'd like to touch on our strategy and some of the changes we've made in the past year to accelerate our growth initiatives. Our overall strategy is to drive profitable revenue growth by delivering best-in-class precision power solutions to customers in our target markets. Our customers rely on Advanced Energy's innovation and technical talent to solve their most challenging power delivery issues. The solutions we develop are typically proprietary and are the foundation of our long-term growth strategy. During 2021, we reorganized our product development and marketing teams to improve the speed and efficiency of our new technology and product development processes. We put a new leadership team in place, blending longtime advanced energy leaders with new leaders from outside the company. The team works well together and our shared priorities are clear. In addition, we have allocated more engineering resources to the semiconductor industrial medical markets. We expect to increase our new product output and win more designs in these markets. Finally, We have taken major steps to strengthen our operations and supply chain organization. We believe that we are well prepared to quickly turn improved component availability into product revenue. In closing, demand for our industry-leading precision power solutions remains extremely strong. We expect that a gradually improving supply chain environment, coupled with our shortage mitigation actions, will drive revenue growth in the second half of the year. As a company, we remain focused on accelerating the execution of our long-term strategy to bring best-in-class precision power solutions to customers in our target markets. Paul will now review our financial results and provide detailed guidance.

Thank you, Steve, and good afternoon, everyone. In the fourth quarter, we delivered revenue and earnings per share above the high end of our guidance ranges. Good execution by our team allowed us to secure additional parts, increase factory output, and begin to recover material cost premiums we've incurred. Demand also increased, with our backlog growing another 20% to $928 million. Our strong Q4 performance demonstrates that as we receive parts, we are able to quickly convert that supply to revenue. Looking forward, however, industry-wide supply constraints persist, and the environment is very dynamic. As a result, we continue to plan prudently in the near term, but see significant pent-up earnings potential as the supply environment improves. Now let me go over our financial results. Fourth quarter revenue was a record $397 million, up 15% sequentially and 7% year-over-year. Sales in the semiconductor were $179 million, growing 3.4% sequentially and 8% from last year. Demand remains strong, driven by robust FAB investments, and we expect semiconductor revenue to grow sequentially again in the first quarter. Revenue from our industrial and medical markets grew 22% sequentially and 5% from a year ago to a record $99 million. We secured more parts than anticipated, allowing us to achieve the strong performance. Customer demand was broad-based, and our backlog in this market increased again this quarter. Data center computing revenue rebounded to $80 million, up 29% sequentially and 23% year over year. Telecom and networking revenue was $39 million, up 31% sequentially, driven by strong telecom shipments to 5G infrastructure, but down 16% year-over-year as a result of our portfolio optimization actions. Non-GAAP gross margin for the quarter declined slightly to 35.5%, mostly related to increased material costs and unfavorable mix. In addition, during the quarter, we recovered from our customers a portion of the premiums we have incurred for purchasing high-cost materials. These premium recoveries benefited revenue, but negatively impacted gross margin percentage by approximately 150 basis points. We expect increased material costs and premium recoveries to continue to impact our gross margin percentage in the near term, but to improve later in the year. Non-GAAP operating expenses were $86.1 million, up $2.5 million from last quarter. The sequential increase was due to investments in critical programs and higher SG&A expense. Operating margin for the quarter was 13.8%. Other expense was $2.5 million, including $1.2 million of interest expense and $700,000 of foreign exchange losses. We expect other expense to be in the $2 million range going forward. Our non-GAAP tax expense was approximately $850,000. The lower than expected tax cost was largely due to a year-end discrete benefit. Excluding this item, the adjusted tax rate would have been approximately 12.5% on a favorable mix of foreign earnings and increased R&D tax credits. Looking forward, we continue to expect our GAAP and non-GAAP tax rate to be in the 15% range. Earnings for the quarter were $1.36 per share, compared to 89 cents last quarter. Excluding the discrete tax benefit, earnings would have been $1.21 per share. Turning now to our full-year 2021 financial results. We achieved record revenue of $1.46 billion, up 3% from 2020, despite the COVID-related impact on our operations and the industry-wide supply constraints. Semi-revenue grew 16%, and industrial and medical revenue grew 9%, both to record levels. Sales into the data center computing and telecom networking markets declined due to supply constraints of critical ICs and our portfolio optimization actions. Increased material cost related to supply constraints was the primary factor impacting our gross and operating margins. As a result, 2021 non-GAAP earnings declined year over year to $4.78 per share. Turning now to the balance sheet. We ended the fourth quarter with total cash of $547 million and net cash of $154 million. Cash flow from continuing operations for the quarter was approximately $35 million and CapEx was $9.2 million. We made debt principal payments of $5 million and paid $3.8 million in dividends. In addition, we repurchased $21.5 million of common stock at $85.12 per share as part of our opportunistic share repurchase program. Days of networking capital in Q4 decreased to 118 days on higher revenues. Inventory decreased slightly on a dollar basis and turns improved to 3.1 times. We expect to see some upward pressure on inventory in the near term, based on demand, but believe this investment allows us to respond quickly to customer demand as critical part shortages abate and represents upside to operating cash flow over time. Days payable fell to 68 days and DSO decreased to 54 days. For the full year of 2021, we generated $141 million of cash flow from continuing operations, despite our investment in raw materials inventory while we await critical parts. In addition, we used $78.1 million to repurchase over 900,000 shares of our common stock during the year. Now let me turn to guidance. We expect the supply environment to remain dynamic with continued risk on timing of critical component deliveries. While our order book increased even after the strong Q4, we expect revenue will continue to be paced by supply. As a result, Our Q1 outlook remains largely unchanged from the view we provided last quarter. We expect Q1 revenue to be approximately $360 million, plus or minus $20 million. Our Q1 guidance assumes semi-revenue will grow sequentially while revenues in the other markets will decline, limited by availability of parts. We expect Q1 gross margin to improve slightly on lower volume. Overall material costs remain elevated. but we expect more favorable product mix and relatively lower material premiums and related recoveries. We expect operating expenses to be up slightly. As a result, we expect Q1 non-GAAP earnings per share to be 94 cents, plus or minus 25 cents, based on a share count of approximately 37.7 million shares. Before I open it up for questions, let me make some comments beyond the current quarter. We enter 2022 with strong demand and record backlog, with greater than 70% mix of proprietary products that can largely be shipped as soon as we can secure parts. Based on this, last quarter we provided an outlook that called for revenue of over $400 million per quarter as supply improves towards the end of 2022. While we do not expect meaningful improvement in the first half, we remain confident in our ability to achieve these revenue levels or higher on a sustained basis as parts become available. In addition, as premium costs normalize, we believe we can deliver greater than $6 per share of annualized earnings exiting this year with additional pent-up earnings potential in 2023. With that, let's take your questions. Operator?