ADVANCED ENERGY INDUSTRIES INC Q3 FY2024 earnings call

Market Performances - Semiconductor: Saw strong revenue performance since Q4 2022, benefited from incremental demand in leading and trailing edge logic process nodes, expects further sequential revenue growth in Q4, on track to deliver over 250 eVoS, eVerest and NavX subsystems to customers by year-end. - Data Center Computing: Continues to benefit from strong investment in AI infrastructure and new products, recorded a record number of EBOs and eVerest qualification units, announced new products at OCP Global Summit addressing AI power requirements. - Industrial and Medical: Revenue down due to customer inventory destocking, but distribution resales solid, design wins robust, with new products and designs in areas like robotics and process automation. - Factory Consolidation: Beginning to have financial impact, with sequential improvement in gross margin, plan to reduce fixed costs, enhance productivity, and improve product mix. ### New Products and Design Wins - Semiconductor: Secured a significant tester win leveraging high-density power module technology, with eVoS, eVerest, and NavX subsystems in high-volume applications. - Data Center: Announced new products at OCP Global Summit ramping to production, addressing higher power requirements of AI applications. - Industrial and Medical: Multiple design wins in new areas such as metal aerospace, factory automation, test and measurement via website expansion driving new customers.

Total revenue was $374 million. Semiconductor revenue was $197 million, up 5% sequentially and 7% year-over-year, contributing ~52.67% of total revenue. Industrial Medical revenue was $77 million, down 3% sequentially and 33% year-over-year, contributing ~20.59% of total revenue. Data Center Computing revenue was $81 million, up 11% sequentially and 18% year-over-year, contributing ~21.66% of total revenue. Telecom and Networking revenue was $19 million, down 22% sequentially, contributing ~5.08% of total revenue.

Fourth Quarter 2024 - Revenue expected to be approximately $392 million plus or minus $20 million, driven by semiconductor growth, flat to up Industrial Medical revenue, high data center computing revenue, and telecom and networking recovery. - Gross margin expected to improve to about 37% as manufacturing cost improvement plans continue. - Operating expenses expected to range from $98 million to $100 million on accelerated new product qualifications and modestly higher variable costs. - Non-GAAP earnings per share expected to be $1.08 plus or minus $0.25. ### 2025 Outlook - Semiconductor next-generation platforms start initial production in the second half of 2025 with a more meaningful ramp in 2026. - Industrial and Medical expect share gains from new product and design win pipelines, expanded digital platform, and normalized inventories. - Data Center demand remains strong with continued investments in AI infrastructure. - Aim to move gross margins above 40% through structurally lower manufacturing and materials costs, completion of transition actions, higher volumes as markets recover, and improved product mix.

Market Volatility: Fluctuations in semiconductor, data center, and industrial medical markets can impact revenue. ### Inventory Destocking: Continued inventory destocking in Industrial and Medical has affected revenue. ### Manufacturing Transition: Costs and challenges related to factory consolidation in China, including restructuring charges. ### Tax Changes: Full adoption of the global minimum tax regime in 2025 is expected to increase the tax rate.

Q: Rough idea of what drove semi equipment revenue upside in Q3 and Q4 outlook, and leading vs trailing edge breakdown A: Steve Kelley mentioned Q3 semi revenue up due to incremental demand in leading and trailing edge logic, expects further sequential growth in Q4, with no exact breakdown between leading and trailing edge.

Q: Inventory destocking in Industrial Medical and confidence in recovery A: Steve Kelley said inventory correction started Q4 2023, distribution resales solid, inventory in channel declining, expecting normalization late Q4 or Q1 2025.

Q: Gross margin guide for Q4, mix dynamics A: Paul Oldham said 37% is on track, some transition activity, mix had headwind but expecting benefits, with China factory closure transition costs.

Q: Design wins funnel and market share in new markets A: Steve Kelley said conversion rate above one in three, still single-digit market share in new markets, momentum in Industrial Medical via website, sales force, distribution.

Q: Data center visibility and sustainability of demand A: Steve Kelley said increased visibility due to design cycle compression, AI and GPU advancements could extend cycle.

Q: Gross margin improvement track, 400 basis points A: Paul Oldham said on track to 400 basis points via manufacturing cost improvements, material premiums abated, China factory closure effect, new products ramping.

Q: Free cash flow in Q4 and year-end A: Paul Oldham said free cash flow up from Q3, better working capital trends, CapEx investments in R&D and infrastructure.

Q: Design wins in Semiconductor and Industrial Medical, visibility A: Steve Kelley said EVOS win high volume, going to production next year, Industrial Medical design wins in new areas via website, sales force, distribution.

Q: Destocking impact vs resales in Industrial Medical A: Paul Oldham said 33% decline due to parts supply crisis recovery, resales improving, inventory normalization expected.

Q: Data center sales visibility A: Paul Oldham said good visibility near term, hard to predict year out, but near-to-mid-term demand strong.