Advanced Energy Industries, Inc.

our direct exposure to the highest tariff rates is limited. Further, with major facilities in Malaysia, the Philippines, and Mexico, our broad manufacturing footprint allows us to optimize production to meet customer needs. Finally, most of the products we import from Mexico into the U.S. are U.S. MCA compliant which under current rules means that they are exempt from reciprocal tariffs. Now let me provide updates on each of our markets. In the first quarter, semiconductor revenue decreased slightly from Q4, but was well ahead of plan. The better than expected results were due largely to strength at the leading edge for both logic and memory processes. We expect semiconductor demand to remain solid in the current quarter, supported by continuing investment at the leading edge. We continue to see strong customer pull for our next-generation EVOS, Everest, and NavX products, and have cumulatively shipped over 350 qualification units through the first quarter. This represents a five-fold increase from a year ago and a meaningful jump for more than 250 units shipped just a quarter ago. Our customers are incorporating these products into their next generation platforms for both logic and memory processes. We expect initial production ramps to start in the second half of this year, followed by more significant growth in 2026. In data center computing, we achieved record revenue, which more than doubled year-on-year. Multiple hyperscale design wins are ramping to volume in 2025. We expect data center revenue to grow in the second quarter and into the second half of the year. Our new products, which feature high reliability, high efficiency, and high power density, are a good fit for power-hungry AI data centers. Our focus on high-end opportunities has yielded deeper partnerships and closer relationships with our key customers. In addition to the products we are currently ramping to production, we have already won key slots in next-generation racks, with expected ramps in late 2025 and early 2026. Industrial medical revenue decreased sequentially, more than we expected. Continuing inventory digestion coupled with weaker turns orders were the primary headwinds we faced in Q1. However, late in the quarter, we saw a meaningful increase in distribution orders, which should drive sequential growth in the second quarter. We believe that industrial and medical revenue likely reached a bottom in Q1. However, the pace of recovery in this market could be impacted by the new tariff regime. On the new product front, we continue to grow our design pipeline. In the first quarter, we recorded major wins in industrial coating, robotics, therapeutic, and life science applications. On past earnings calls, I've talked about the success of our new customer-friendly website. We've been working closely with our key distributors to expand our presence on their websites. Mouser Electronics, the first distributor to launch their enhanced AE microsite, reported a 60% increase in page views in the first quarter. We expect similar results when our other distributors launch their AE microsites later this year. These enhancements make it easier for engineers to quickly identify the right advanced energy product and find available inventory. In the telecom and networking market, we experienced a modest sequential revenue decline in the first quarter, as anticipated. Going forward, we expect revenue in this market to remain within our target range. Now for some closing thoughts. First, we are off to a good start in 2025, thanks to strength in the data center and semiconductor markets, the success of our new products, and continued improvements in operational efficiency. For the remainder of the year, we will focus on maintaining our new product momentum, staying close to our customers, and completing our factory consolidation plan. Second, based on our understanding of the current tariff environment, we believe that we are relatively well positioned. and are taking the right actions to minimize our exposure. Third, demand for our new products is very strong. Our R&D investments are paying off as customers incorporate our new technology into their leading edge products. Finally, with a strong balance sheet, we continue to look for inorganic growth opportunities which make strategic and financial sense. To summarize, Our results and guidance show that Advanced Energy is executing well in a dynamic market environment. We are confident that we can grow revenue, gain market share, and improve our margins in 2025. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. Let me start with the headlines. We executed well in a dynamic environment. First quarter revenue of $405 million was ahead of our guidance, with strength in data center computing and semiconductor more than offsetting weakness in industrial and medical. Gross margin of 37.9% was better than expected, and we managed spending to the low end of our projection. As a result, earnings per share was $1.23, well above our guidance. Looking into Q2, with near-term demand visibility in data center and semiconductor and the ramp of new products, we expect revenue and earnings to grow sequentially and to be above our previous expectations. Finally, in April, we took advantage of market volatility and repurchased $22.7 million worth of common stock at an average price of $83.78 per share. Now let's review our first quarter financial results in more detail. Total revenue of $405 million decreased 3% sequentially, but increased 24% year over year. Semiconductor revenue was $222 million, down 2% from Q4, but up 23% from last year. Strong demand in AI-related leading edge foundry logic and memory drove the better than expected results. Data center computing revenue was a record $96 million, up 9% sequentially and 130% year-over-year. Multiple new hyperscale programs started to ramp this quarter and are expected to drive further growth in Q2. Revenue in the industrial and medical market was $64 million, down 16% from Q4 and 23% from last year due to ongoing channel inventory destocking and lower turns revenue. However, orders rebounded during the quarter. Telecom and networking revenue declined 5% sequentially and 2% year over year to $22 million, in line with our expectations. First quarter gross margin was 37.9%, down just 10 basis points from last quarter, but up 280 basis points from last year. Gross margin was above our previous guidance, even with the initial impact of tariffs that started in March, driven by favorable product mix and improved manufacturing costs. Operating expenses of $98.6 million were down more than $3 million from last quarter and at the low end of our target range. OPEX increased only modestly year-over-year, while revenue increased 24%, well ahead of our target of growing OPEX at half of revenue growth. As a result, First quarter operating income was $55 million, and operating margin was 13.5%, up almost 700 basis points year-over-year. Depreciation was $11 million, and our adjusted EBITDA was $65 million, which more than doubled year-over-year. Other income of $1 million was lower sequentially, mainly due to the impact of investment returns on deferred compensation. For Q1, our non-GAAP tax rate was 15.8%, below our target mainly due to delayed implementation of the Pillar 2 global minimum tax regime in certain jurisdictions. We continue to expect the tax rate to increase to approximately 19% for the balance of 2025 based on full adoption of the GMT. As a result, first quarter earnings were $1.23 per share. compared to $1.30 per share in the previous quarter and 58 cents per share a year ago. Turning now to the balance sheet. Total cash and cash flow equivalents at the end of the first quarter was $723 million, with net cash of $158 million. Cash flow from continuing operations was $29 million. Inventory increased $8 million as we added critical piece part inventories to support near-term growth. Inventory days increased from 126 in Q4 to 132 in Q1, and inventory turns were 2.7 times. DPO increased from 50 days in Q4 to 56 in Q1, and DSO increased from 57 days in Q4 to 62 in Q1. During the first quarter, we invested $13.9 million or 3.4% of revenue in CapEx. Finally, we paid $3.8 million in dividends and repurchased $908,000 of common stock at an average price of $94.26 per share. Before I talk about guidance, let me give you a little more color on the impact of tariffs and trade on AE. As you know, The situation is very dynamic, potentially increasing macroeconomic risk and making longer-term financial projections difficult and subject to change. However, we believe that AE is relatively well positioned. From a revenue perspective, our customers are still projecting continued investments in artificial intelligence and new technologies. In addition, incremental revenue from new products in data center and semiconductor should position us to outgrow our markets and gain share. From a cost perspective, while tariff expense will increase near term, we are taking actions to mitigate the financial impact. As Steve noted, we are starting with a favorable geographic manufacturing footprint, giving us the flexibility to optimize production in lower tariff countries and utilize exemptions like USMCA wherever possible. We are working with our supply chain to limit imports from high tariff locations, qualify alternate vendors or parts, and redirect goods flow where it makes sense. Finally, we expect to make price adjustments to cover costs which cannot otherwise be mitigated. As a result, assuming no major change in the current environment, we expect to continue to be able to meet our gross and operating margin targets over time. Turning now to our guidance. First, our outlook contemplates our assessment of the direct impact of tariffs. Based on solid customer demand, we expect revenue in the second quarter to grow sequentially and the second half to grow low single digits over the first half. In the data center computing market, we expect continued ramp of new programs for customer AI investments to drive strong sequential growth in the current quarter and potentially beyond. we expect Q2 semiconductor revenue to moderate slightly from Q1. Based on the stronger than expected first half, we now project semiconductor to grow around 10% for the year, partially due to initial production ramp of our new products. Within industrial and medical, we believe Q1 was the bottom and expect revenues to start recovering in Q2 on increased orders. However, we expect the rate of recovery to be tempered by economic uncertainty and the cost of tariffs. As a result, we are forecasting our second quarter revenue to be approximately $420 million, plus or minus $20 million. We expect Q2 gross margin to be around 38% on continued improvement in manufacturing and higher volumes, offset by less favorable mix and the impact of the new tariffs. We expect Q2 operating expenses to increase to $99 to $101 million due primarily to investments in new products and annual merit increases. We expect other income to be approximately $1 million per quarter and the tax rate to be in the 19% range. As a result, we expect Q2 non-GAAP earnings per share to be $1.30 plus or minus 25 cents. Given our expected market share gains in data center and next generation semiconductor products, we have decided to increase our full year 2025 CapEx guidance to 5% to 6% of revenue. While this is above our prior target of over 4%, our strong balance sheet enables us to make this investment in high volume capacity to capture revenue upside and support new product introduction capability. Before opening it up for questions, I want to highlight a few points. Although the new tariff and trade policies are creating macro uncertainty, particularly in the second half, we believe we are relatively well positioned. We believe we are gaining share across our markets, supported by multiple generations of high-end data center solutions, leading-edge plasma power platforms, and a broad set of customized industrial and medical design wins. We're on track to complete our China factory closure this quarter, providing margin uplift in the second half. As we demonstrated in Q1, we continue to improve our cost structure and are committed to find ways to offset the increased cost of tariffs and achieve our gross margin expansion goals over time. Finally, our strong balance sheet and net cash position enable us to fund investments in capability and capacity for growth, opportunistically repurchase our stock to offset dilution, and maintain ample liquidity to pursue strategic acquisitions that create shareholder value. With that, we'll now take your questions. Operator?

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 question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And the first question comes from the line of Brian Chin with Stifel. Please proceed with your question.