Advanced Energy Industries, Inc.

On the design win front, I'm pleased to report that we have secured our first major wins for both the EVOS and Everest next generation plasma power products. Over the course of this year, we expect to announce more major design wins, which we believe will drive share gains in the coming years. We have already shipped more than 50 EVOS and Everest systems. And customers have requested that we ship another 150 systems before year end. We are putting a lot of effort into keeping up with the extraordinary level of demand for these new technologies, which enable our customers to operate much more efficiently at leading edge nodes. The modular architecture of Everest has dramatically shortened the development cycle time for derivative products. Our engineering teams have become more productive, enabling our customers to accelerate the introduction of next-generation etch and deposition systems. For both EVOS and Everest, we took a modular approach, leveraging our broad portfolio of high voltage, low power, RF, and advanced control technologies to bring best-in-class solutions to our customers. Advanced energy development teams from around the world work closely together to make these products a reality. Moving to industrial medical, where first quarter revenue was impacted by inventory corrections. Design activity in industrial and medical is extremely robust. After three years of dealing with supply chain shortages, our customers are now squarely focused on product innovation and differentiation. Design wins have been broad-based, including major first-quarter wins in medical imaging, electrosurgery, and warehouse automation. In March, we launched our evergreen high-power platform, which features best-in-class efficiency and power density. Target applications include aerospace and defense, fast charging stations, industrial lasers, and large capital equipment. Our new industrial medical products are supported by focused sales teams and our new digital platform, which now includes e-commerce capability. In addition, our quick-turn engineering team works closely with customers to modify and customize our standard products to meet specific application needs. Moving on to data center computing, where first quarter revenue was slightly below expectations due to the push out of a single hyperscale program into the later quarters of the year. We are forecasting a significant rebound in second quarter revenue, driven by increased hyperscale AI investments and our share gains in enterprise AI servers. Telecom and networking revenue decreased sequentially. Reduced infrastructure investment and high inventory levels constrained revenue. we expect these challenging market conditions to persist throughout 2024. Now let me summarize our outlook. We expect the first quarter to be our revenue trough for the year. In the second quarter, we expect that the surge in data center computing demand will drive sequential revenue growth. As we move into the second half, our outlook remains largely unchanged from our last earnings call. This is based on our expectation that conditions in the semiconductor, industrial, and medical markets will gradually improve, driving sequential quarterly growth. Customers are embracing our new technologies and products, and design-in activity is at an all-time high. We expect that these design wins will drive market share gains in our target markets. Our manufacturing consolidation plan is on track, giving us confidence in our ability to move gross margins above 40% as markets recover. Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities, which make strategic and financial sense. Looking forward, we believe that the investments we are making in R&D and manufacturing, coupled with potential acquisitions, will accelerate our medium and long-term profitable growth. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. First quarter revenue declined 19 percent quarter over quarter driven by a challenging demand environment in our non-semi-markets. Despite the lower volumes, healthy product mix and solid execution allowed us to meet our gross margin target, and steps we took to control our operating expenses enabled us to deliver earnings per share of 58 cents, which was within our guidance. The market environment in the first quarter was characterized by higher-than-expected customer inventory destocking and reduced demand at telecom and networking customers. Semiconductor revenue in Q1 was ahead of our expectations. Backlog declined modestly from the end of last year and was in line with our target of slightly more than a quarter of revenue. At the same time, this was the second consecutive quarter of higher bookings, which supports our Q2 outlook for a sequential revenue rebound. Based on some early signs of improvement, We believe our Q1 revenue will be the trough and expect business levels to increase over the remainder of the year. Now let's review our financial results in more detail. Revenue in the semiconductor market was $180 million, down 6% sequentially and 7% year-over-year. Results were slightly better than our guidance, with sequential growth in services. We continue to expect Q2 revenues around this level with the second half stronger than the first half. Revenue in the industrial medical market was $83 million, down 23% from last quarter and 32% from last year. The impact of shorter lead times and increased inventory throughout the channel resulted in higher than expected levels of inventory rebalancing at both our OEMs and distributors. We expect revenues to remain around this level until inventories begin to normalize in the second half. Data center computing revenue is $42 million, down 33% sequentially and 30% year-over-year. Although we had expected lower revenue this quarter, we also saw a single hyperscale program push out into the remainder of the year. However, based on recent order rates, Driven by increased investments in AI across multiple programs, we expect revenues to meaningfully rebound starting in the second quarter. Telecom and networking revenue declined 48% sequentially and over 50% year-over-year to $22 million, following a very strong 2023 in which customers replenished inventories following the supply chain crisis. However, demand in Q1 was even lower than our expectations. due to further weakening in both the telecom and networking markets, increasing the impact of inventory destocking. We expect these market conditions to persist through the end of the year. First quarter gross margin was 35.1%, down 60 basis points from last quarter and 170 basis points from last year. Results were in line with our expectations, despite the lower volume, due to favorable product mix and actions we are taking to lower costs. we expect Q2 gross margins to be at a similar level on higher volumes but less favorable mix. In the second half, we continue to expect gross margins to increase, driven by our ongoing manufacturing consolidation activities, higher volumes, and reduced material costs. Operating expenses were $93.5 million, down from last quarter and below our target. Q1 was the fifth consecutive quarter that we reduced operating spending, which is down more than 7 percent from Q4 of 2022, despite the inflationary environment. We will continue to focus on controlling our discretionary spending while investing to support new product and platform activities throughout the year. Operating income was $21 million for the quarter, depreciation was $10 million, and our adjusted EBITDA was $31 million. Other income was $5 million at the high end of our guidance with interest income higher than interest expense consistent with Q4. We expect other income to remain around $5 million per quarter until the swap instrument against our outstanding term loan expires in September of this year. For Q1, our non-GAAP tax rate was 17.7%, higher than our target of 16% due to timing and geographic mix of profits. We expect the tax rate to remain in the 17 to 18 percent range for the balance of the year. First quarter EPS was 58 cents per share, compared to $1.24 in both the previous and year-ago quarters. Turning now to the balance sheet. Total cash and investments at the end of the first quarter was $1.02 billion, with net cash of $106 million. Cash flow from continuing operations was $8 million. Timing of previous year incentive payments, higher inventory on strategic investments, and lower revenue impacted our cash flow. Overall, inventory increased $25 million, or 7.5% sequentially, resulting in inventory days of 153 in Q1. DPO increased from 49 days in Q4 to 58 days in Q1. Receivables declined by $35 million on lower revenue, and DSO was up slightly to 68 days. During the first quarter, we invested $16.6 million in CapEx. We continue to expect that 2024 CapEx will be approximately 4 percent of sales. We also made debt principal payments of $5 million and paid $3.8 million in dividends. Turning now to our guidance. We expect second quarter revenue to rebound from a Q1 trough, driven primarily by a recovery in data center computing. We expect semiconductor revenues to be at similar levels to the first quarter, and we expect industrial and medical and telecom and networking markets to be approximately flat as customers continue to rebalance their inventories. As a result, we are forecasting our second quarter revenue to be approximately $350 million, plus or minus $20 million. We expect gross margin in Q2 to remain at around Q1 levels on higher volumes and improved costs, offset by less favorable mix. We expect Q2 operating expenses to increase $1 to $2 million sequentially, due primarily to increased R&D investments to support new product launches and investments to scale a company. As a result, we expect Q2 non-GAAP earnings per share to be 73 cents, plus or minus 25 cents. Before opening it up for Q&A, I want to highlight a few important points. Overall, we continue to invest and set priorities with a long-term view of the market while managing prudently given near-term dynamics. Despite the lower results in Q1, we expect revenues to improve sequentially in Q2. In addition, we expect the second half to grow largely as we had previously projected. driven by incremental revenue across several programs and timing of market improvement. Looking beyond this year, we believe we are focused on the right markets with strong customer pull for our highly differentiated products and technologies. As a result, we expect to deliver strong growth and market share gains as markets recover. Second, we believe earnings for the year will continue to be largely in line with our previous projections. We are executing our plan to improve our gross margins and profitability. We continue to expect gross margins to expand in the second half of the year, reaching our target of 37.5% to 38% by the end of the year as revenue improves. In addition, we expect operating expenses to grow modestly over the next several quarters as we manage our cost structure while investing in new products and scale to drive future growth. Beyond this year, We believe we are on track to achieve our gross margin goal of over 40% as quarterly revenue recovers to the mid $400 million range and to deliver higher earnings than our prior peak as markets recover. Finally, we have a strong balance sheet and are well positioned to execute acquisitions that make financial and strategic sense. With that, we'll take your questions. Operator?

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