Advanced Energy Industries, Inc. (AEIS) Earnings

Management highlights

- Overall Financial & Operational Performance * Delivered record Q2 2026 results, with revenue and earnings exceeding the high end of prior guidance, driven by strengthening demand across all target markets and strong factory execution. * Gross margin continues to improve, supported by manufacturing efficiency gains, a richer product mix of higher-value new products, and targeted pricing actions on mature lines to offset higher input costs. * The company is increasing output at its Malaysia factories and qualifying the new Thailand facility, with first production revenue expected in Q4 2026; full buildout of Thailand will bring total global revenue-generating capacity to roughly $5 billion. * R&D investment is increasing to maintain technology leadership; a modular product approach enables technology reuse, reduces development cycle time, and speeds time to market. - Semiconductor Segment * Record Q2 revenue with 27% sequential growth, aligned with a rapidly growing semiconductor equipment market driven by strong demand for leading-edge memory and logic, and increasing power intensity per wafer. * New Everest and EVOS plasma power platforms have been validated by customers for leading-edge processes, delivering meaningful yield and throughput improvements that are expected to drive future market share gains. * Multiple new design wins secured in test, ALD, and thermal sensing system power applications, with several programs ramping to production; new product revenue is expected to accelerate growth from 2027 onward. - Data Center Computing Segment * Robust demand is expected in H2 2026, driven by increased spending from hyperscaler customers. The company is pursuing opportunities with "second wave" (non-top hyperscaler) customers that will drive accelerating growth from 2027 onward. * New 800V data center power solutions, featuring industry-leading power density, efficiency and modularity, have received positive customer feedback during sampling, with high-volume production expected to begin in 2028. - Industrial and Medical (I&M) Segment * Revenue grew sequentially and YoY, with key new design wins ramping to volume and improving overall market demand. The distribution channel, which accounts for ~50% of I&M revenue, saw improving resales, orders and inventory levels this quarter. * The company is working down overdue I&M backlog and expects to catch up to demand in H2 2026. Multiple new medical wins were secured in therapeutic, imaging, life science and electrosurgery applications, with strong momentum driven by differentiated pulse power technology. * Industrial wins include key slots in test and measurement, factory automation, robotics, and aerospace and defense. Digital marketing and channel strategies have grown the customer base, with design wins originating from website inquiries up 40% YoY in H1 2026. - Strategic & Balance Sheet Updates * The company completed a $1.15 billion 0% coupon convertible note offering in May 2026 and redeemed $438 million of 2028 convertible notes, with a planned redemption of the remaining $136 million of 2028 notes in September 2026. Total cash and equivalents reached $1.4 billion at quarter-end. * The company is building strategic piece-part inventory to support customer ramps and manufacturing flexibility, with inventory days increasing to 145 days and inventory turns of 2.5x. The company continues to actively evaluate strategic acquisitions that meet financial and strategic criteria.

Guidance

- Q3 2026 guidance calls for total revenue of ~$640 million (plus or minus $20 million), with gross margin in the 41% to 41.5% range (up from Q2 excluding the one-time tariff refund benefit). Non-GAAP EPS is expected to be $3.00 (plus or minus $25 cents). - Full-year 2026 revenue growth guidance is raised to the low-to-mid 30% range, up from the prior low-to-mid 20% range. Data center full-year revenue growth guidance is raised from the mid-30% range to at least 50%, driven by accelerated hyperscale investment. - Semiconductor segment H2 2026 revenue is expected to grow nearly 50% YoY. Industrial and medical revenue is projected to grow sequentially through the second half of the year. - Full-year 2026 operating expenses are expected to be ~$470 million, with gross margin improving through H2, reaching ~42% in Q4 2026. Management has line of sight to a long-term gross margin of over 43%. - 2026 CapEx guidance is increased to $180-$195 million, up from prior guidance, to support accelerated capacity investments. Despite higher CapEx and inventory investment, 2026 free cash flow is still targeted to be at or above 2025 levels. - Management indicated the company is positioned to deliver over 20% total revenue growth in 2027.

Segment performance

Total Q2 2026 revenue was $574 million, up 12% quarter-over-quarter (QoQ) and 30% year-over-year (YoY). - Semiconductor: Record revenue of $278 million, up 27% QoQ and 33% YoY, representing 48.4% of total Q2 revenue. - Data Center Computing: Revenue of $192 million, down 1% QoQ but up 35% YoY, representing 33.5% of total Q2 revenue. - Industrial and Medical: Revenue of $80 million, up 11% QoQ and 17% YoY, representing 13.9% of total Q2 revenue. - Telecom and Networking: Revenue of $24 million, down 4% QoQ but up 12% YoY, representing 4.2% of total Q2 revenue. Overall gross margin for Q2 was 41.9%, an improvement of 380 basis points YoY. Excluding one-time IWPA tariff refunds, gross margin was 40.7%. Operating income hit a record $125 million, with operating margin of 21.9%, up 730 basis points YoY. Non-GAAP EPS was $2.74, up 83% YoY.

Risks & headwinds

- Actual results may differ materially from forward-looking statements due to inherent risks and uncertainties, which are detailed in the company's SEC filings. - Extended component lead times and potential supply chain shortages could constrain production and revenue if not properly managed. - New product adoption and customer qualification of new facilities (such as the Thailand factory) may take longer than expected, delaying revenue recognition. - WFE market mix fluctuations can impact the company's ability to outgrow the overall semiconductor equipment market in any given year, even with long-term share gain momentum.

Analyst Q&A

• Q: What has improved in data center demand over the past three months, and what is driving expected accelerating growth in 2027? /

  A: Customers have resolved prior downstream supply chain constraints, enabling the company to raise its H2 and 2027 growth outlook. Three vectors drive 2027 growth: existing engagements with hyperscale customers ramping to higher volume, wins with second wave customers earned in 2026 ramping to volume in 2027, and early engagement for new opportunities that will ramp to production in 2028.

• Q: Is Advanced Energy on track to outgrow WFE in 2026 and 2027, and what is driving new product traction? /

  A: The company is well ahead of the share gain targets laid out at its 2024 analyst day, with new platform adoption in both plasma and system power driving share gains. New platforms deliver yield and throughput advantages for leading-edge logic, NAND and DRAM processes, leading to strong pull from major customers. Modular product design enables fast derivative development, and the company is gaining share across both plasma and system power sub-segments.

• Q: Why is the 800V product ramp expected in 2028, later than some competitors, and how is the company positioned for this transition? /

  A: The company has developed modular 800V solutions (both AC-DC and DC-DC) with industry-leading 98% efficiency, high power density and reliability that have received positive customer feedback during sampling. Initial production revenue is expected in late 2027 with meaningful volume ramping starting in 2028, aligned with customer product roadmaps. Management expects 800V will coexist with lower voltage architectures, and the technology transition creates an opportunity to gain share and increase content per rack.

• Q: What is driving gross margin improvements going forward, and what role does pricing play? /

  A: Management's goal is to remain price-cost neutral, passing through unavoidable input cost increases to customers after mitigation via second sourcing and negotiation. Longer-term gross margin growth will come from three structural improvements: a higher mix of higher-value new products (which is already delivering benefits), volume leverage from growing revenue, and future manufacturing efficiency gains as the company scales output. The company now expects it can exceed the prior 43% long-term gross margin target as revenue is already growing faster than planned.

• Q: How is the Thailand factory ramp progressing, and how will capacity be allocated across markets? /

  A: First production revenue in Thailand is expected in Q4 2026, with large semiconductor and data center customers currently qualifying the facility. The new capacity will support continued overall growth of over 20% in 2027, with capacity allocated to meet demand across semiconductor, data center and industrial and medical markets. CapEx investments in data center capacity have delivered fast payback, and the expanded network eliminates major capacity constraints.