Advanced Energy Industries Inc (AEIS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Advanced Energy Industries second-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Annie Leschin, Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Advanced Energy's second-quarter 2016 earnings conference call. With me on today's call are Yuval Wasserman, President and CEO; and Tom Liguori, Executive Vice President and CFO.

By now, you should have received a copy of the earnings release that was issued yesterday afternoon. For a copy of this release, please visit our website at advancedenergy.com.

Before we begin, I would like to mention that AE will be presenting at the Pacific Crest Global Technology Leadership Forum in Vail, Colorado on August 8, and at the Credit Suisse Small and Mid-Cap Conference in New York on September 14, and at the Dougherty Institutional Conference on September 28. As other events occur, we will make additional announcements.

Now I'd like to remind everyone that, except for historical financial information contained herein, matters discussed on this call contain certain forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Statements that include the terms believes, expects, plans, objective, estimate, anticipate, intends, target, goals, or the like, should be viewed as forward-looking and uncertain.

Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the markets we serve; the timing of orders received from our customers; and unanticipated changes in our estimates, reserves, or allowances; as well as other factors listed in our press release. These and other risks are described in Form 10-Q, 10-K, and other forms filed with the SEC.

In addition, we assume no obligation to update the information that we have provided you during this call, including our guidance provided today in our press release. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

And just as a reminder, in today's call, we will refer to GAAP and non-GAAP results. Non-GAAP measures exclude the impact of stock-based compensation, amortization, restructuring costs, and significant nonrecurring items. A reconciliation of non-GAAP income from operations and per-share earnings is provided in the press release tables. We will be referring to earnings slides posted on the Investor section of our website.

And with that, I'd like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Annie. Good morning, everyone, and thank you for joining us for our second-quarter conference call. Continuing the momentum of the first quarter, AE had a particularly strong second quarter that exceeded expectations, driven by strengthen in all of our applications.

Our semiconductor and service businesses posted record performances, and our industrial markets rebounded as well. In total, revenue grew 15% sequentially to nearly $119 million. At these levels, our advantageous cost structure and financial model generated a 33% increase in non-GAAP EBS from the first quarter. We ended the quarter with $250 million in cash, having generated over $30 million.

With a focus on leveraging our leadership in highly-engineered, precision power solutions for critical applications in semiconductor processing, thin films industrial power, and specialty power applications, we are progressing towards our three years' aspirational goals of $600 million to $700 million in revenues, $3 to $3.50 in non-GAAP EPS, and $200 million to $300 million of cash generation.

Building on our recent design wins and the resulting growth trajectory we saw in the first quarter, our semiconductor business reached its highest revenues yet at $78.6 million in the second quarter. At 13% sequential growth, our results outperformed initial expectations and the broader wafer fab equipment market. Technology upgrades in DRAM, 3-D NAND, and the capacity expansion at semiconductor manufacturers, led to renewed demand, increased order activity, and pull-ins from some of our OEMs.

Much of the growth we are experiencing today is a direct result of the designs won with key customers over the past two years. New power technology, aimed at advanced deposition and etch applications, is materializing into revenue growth as the industry transitions these applications to high-volume manufacturing in memory and logic.

These transitions, particularly in 3-D NAND, are positively impacting the industry as a whole, leading to new fabs and the next generation of capital equipment that requires advanced process power solution. The migration to advanced 3-D technology is driving a significant increase in the number of deposition and etch process steps, leading to more processing tools with a higher number of process chambers.

Today's etchers can have between 4 to 6 chambers per platform. In order to address the increasing demand for better control of ion density and energy that are required for more sophisticated device architectures, much higher power content, and more complex power solutions, are being used, including pulse RF and high-speed dynamic tuning.

Where once we had just one RF powertrain per chamber -- a generator and a matching network -- there can now be as many as three or four power system per chamber to provide the process performance needed. This complexity increases our content for plasma process tool. Our ongoing investment and success in designing these power supplies and accessories for next generation plasma-based applications is expanding our addressable market and solidifying AE as a leading supplier to our customers.

This quarter, we again won design slots for advanced memory applications as the migration to even more advanced 3-D devices continues. Another area where we are winning share is the emerging atomic layer deposition in etch market. Additionally, we are winning designs in remote plasma source applications, including wafer processing and abatement.

Finally, as we deploy our high voltage technology in additional semiconductor applications, we are expanding our design wins to electrostatic chuck applications. E-chuck technology is becoming very important as more complex and dynamic processes are applied to wafers. Given that most of the process tool require e-chucks with unique, high-voltage power supplies and voltage control requirements, this market represents an interesting opportunity.

While our design wins should fuel our growth for the foreseeable future, sequentially, we may see a slight pause in our semiconductor business after a record quarter where we saw a surge in demand, driven by specific OEMs that are increasing their component inventory in anticipation of further growth. Overall, we believe the market remains robust as the ramp for 3-D NAND accelerates, 10 nanometers develops and picks up speed, and foundry and logic increase as the year progresses.

In our industrial applications, the second-quarter posted a solid recovery as revenue grew nearly 34% from the first quarter. Every industrial market we serve rebounded from the first quarter lows, led by industrial thin films, where process power supplies for non-semi applications saw significant sequential growth.

An important highlight was the improvement in large area glass coating applications. 2016 is shaping up to be a year of retrofits and upgrades of older technology rather than new glass coating lines, due in part to the sluggish Chinese economy and overcapacity.

Automotive headlight coating also improved noticeably from the first quarter, as did solar PV, due primarily to capital equipment investment and incentives in China as the government policy promoting PV power expansion continued. Overall, while they remain weak, the general industrial market seems to have solidified after the first-quarter lows.

In specialty industrial power, we saw a substantial boost in orders in the quarter, as most PCM and high-voltage applications, including X-ray, mass spectrometry, and scanning electron microscope began to recover. Halfway through the year, our expansion into industrial thermometry, or remote sensing thermometry, is gaining momentum in applications such as PV solar cell manufacturing. Finally, traction with our industrial automation partners is adding to our penetration into key geographies and customers.

An essential component is our ongoing success in winning new designs. This quarter in industrial thin films we saw a number of OLED design wins in keeping with the trends in flat-panel display as the industry retools for the next wave of new technology. In specialty industrial power, our strategy to gain share in non-semiconductor high-voltage applications is making headway. We won the vast majority of the design we pursued, including a mass spectrometer win and newer applications in life sciences such as DNA sequencing, which should contribute in 2017.

The clear advantage to our industrial business is its diversification amongst markets, applications, and customers, helping to balance out the different investment cycle. After a much improved second-quarter for all of our markets, we expect to see continuing growth in the third quarter, driven by substantial demand in flat-panel display coming from strong OLED and LCD equipment markets; multiple customers and applications, including the deposition of metals, dielectric, and optical films, and touch panels.

Other areas such as glass, industrial coating, and high-voltage for semiconductor applications, are expected to slow, while high-voltage life science and X-ray are expected to grow. We expect solar PV revenue to continue and increase, driven by demand by OEMs in Asia and EMEA. Overall, we expect industrial applications as a whole to see a steady recovery as worldwide industrial trends turn incrementally more positive.

Our service business has record revenues in the second quarter at $18 million. Clearly, our value proposition is resonating with customers, as reflected by the increases that we saw across geographies this quarter. Our focus on superior repair quality and highly engineered aftermarket service solutions is lowering customers' total cost of ownership.

These solutions include new adaptations of old platforms to extend reliability and additional features, upgrades, and retrofits. Armed with these offerings, we are capturing third-party market share. Additionally this quarter, we grew our industrial and specialty power aftermarket repair service.

Looking ahead, we expect to see our service business grow, albeit not at rates quite as high as the second quarter. Given the demand we are seeing in Taiwan, Korea, and Japan, we have begun to expand our capability for service around the world, including new labs and capacity. We are engaging with existing and potential customers in regions such as China as they develop their capabilities. We are investing resources to ensure that we are the most responsive and reliable partner to our customers in a variety of ways, including local engineering teams to develop products that are region and customer-specific.

In closing, after a strong first half of 2016, we look for solid growth of our business in the third quarter, driven mainly by growth in our industrial markets. Our primary goals are centered on our core competencies as a pure play precision power conversion company.

We are investing in next-generation technology with our customers to advance our leading position in the market as a critical enabler. With the current generation of 3-D NAND just ramping to mass production, and the industrial markets recovering, we remain confident in the opportunities we see ahead.

I'd like to thank our customers, partners, shareholders, and our valued employees for their support. Thank you for joining us and we look forward to seeing many of you in the upcoming quarter.

I would like now to turn the call over to Tom. Tom?

Thank you, Yuval. Record sales and semiconductor and service, together with the recovery of our industrial markets, led to total revenues of $118.8 million. The leverage in our financial model was apparent this quarter, as non-GAAP earnings per share increased 33% on a 15% sequential increase in revenues. Non-GAAP operating margins improved to 27.8% and non-GAAP EPS improved to $0.73.

Turning to sales by market, semiconductor sales increased sequentially by 12.7% to $78.6 million as the upward trend continued. With the rebound in our industrial markets from a low first quarter, and our ongoing initiatives to expand into new applications, industrial sales grew 34% from the first quarter to $22.2 million.

Service revenues reached an all-time high of $18 million in the quarter, increasing 7.5% over last quarter and 4.5% year-over-year. We continue to expand our capacity and geographic footprint, capturing additional market share.

The upward trend in revenues drove increased earnings power. Second-quarter non-GAAP operating margin increased to 27.8% from 25.3% in the first quarter. Non-GAAP EPS rose 33% sequentially to reach $0.73 in the second quarter compared with $0.55 in the first quarter. Commensurate with our strong revenues, total operating expenses increased 6.3% from the first quarter.

Our ongoing commitment to maintaining our technological lead, strengthening our global marketing channels, and expanding our service capabilities in new geographic locations, are important investments to ensure our ability to meet our customers' rapidly evolving needs.

As you know, we have been actively pursuing acquisition opportunities, focused primarily on expanding our SAM in industrial markets. We continue to narrow our pipeline of opportunities to those that meet our criteria for growth, expansion, and profitability, while delivering the best possible return to shareholders.

The tax rate for the second quarter was 12.5%, down from 15.7% in the first quarter. We continue to expect a normalized annual tax rate of approximately 15% for 2016, assuming existing regulations.

Turning to the balance sheet, we generated $31.1 million of cash to end the quarter with $215.1 million in cash and marketable securities. Since the beginning of the year, we have increased our cash position by $44.6 million, reflecting the power of our model.

Improvements in our working capital management are contributing to cash flow. Net working capital days in the second quarter declined by 16 to 82 days at the end of the quarter. We made progress lowering our receivables DSO and improving inventory turns. Under our third-quarter guidance, as you have all noted, we expect to see growth in the third quarter, driven primarily by the ongoing momentum in many of our industrial markets.

In summary, we continue to advance toward our three-year aspirational goals of $600 million to $700 million in revenues, $3 to $3.50 of non-GAAP earnings-per-share, and $250 million to $300 million in cash generation. We remain focused on our long-term capital deployment strategies to achieve these goals and accelerate shareholder returns.

Internally, we continue to make strategic investments to penetrate industrial markets, expand our presence in semiconductors, and grow our worldwide service capabilities. The evaluation of our M&A pipeline is progressing, and we remain focused on this critical long-term effort. We look forward to updating you on our next call.

This concludes our prepared remarks for today. Operator, I'd like to open the call for questions.

(Operator Instructions). Joe Maxa, Dougherty & Company.

Congrats on a nice quarter. Yes. A question on the semi side, slight pause, looking at Q3. I know you don't guide further out, but are you getting any sense there could be a bigger pause in Q4? Or do you think we will continue to see some pretty healthy levels in the business going through this and next year?

So let me address this. First of all, let's talk about Q3. We had a uniquely high Q2, driven by significant pull-ins by some of our OEMs that depositioned material for an accelerated growth they expected to see in Q3.

As you all remember, usually we provide our power supplies to customers a little bit ahead of their delivery time -- could be up to a quarter. So that increase in Q2 was driven also by a lot of pull-ins for the last -- during the last month of the quarter.

Long-term, we are constructed going forward, very much in line with what we read and heard during Semicon West. We expect that the semi industry will continue to -- equipment company industry will continue to grow well into 2017, as we heard from customers and stakeholders and analysts during Semicon West.

I hope that answers the question, Joe.

Yes, that does. Thank you, very helpful. Then --

And one more -- I'm sorry, one more comment. Q3, when we see slight pause, it does not mean a meaningful decline. It means -- we believe it will be flattish for semi. Overall, we expect the business to grow.

Right. I see that. And along those lines on the industrial, the strength you are seeing, given your guidance, suggests you'd see a nice sequential pickup in the industrial side of it?

That is correct.

Right. Okay, thank you very much.

Thanks, Joe.

Edwin Mok, Needham & Company.

Thanks for taking my question. So, first, just kind of following up on the industrial, I think you've always said that there was a number of the OEM design wins that you guys secured this past quarter. Is that the driver for industrial growth? Or is that one of the bigger driver of industrial growth?

And just kind of along the line, we also heard a lot of investment around that. Have you seen those investments starting to drive your business in the second quarter? Or is that more the back-half of this year?

For us, I think that that the second half will benefit from OLED. We are seeing demand for our product from current customers and also new customers that we have secured project-based purchase orders in new areas such as Asia and EMEA.

So overall, as we previously stated in other public settings, we are a supplier to the OLED industry. We're a supplier to a lot of the major capital equipment manufacturers. And we expect to see the benefit coming from that -- OLED, LCD, and touch panels -- during the second-half.

Okay, that's helpful. And another piece in the industrial space that I think you guys highlight was the mass spec. You expect to see share gain and eventually driver for growth.

I was wondering, any way you can maybe quantify the opportunity there or -- either just on mass spec or maybe mass spec plus X-ray. Sounds like those are the two areas that you guys are focusing on. And given that those are more design win type of business opportunity, I would imagine similar to semi-cap once you win the design, a period down the road, you might see a more meaningful ramp-up.

So, we should try -- I'm just trying to get a sense in terms of opportunity in how much of those design wins can translate to revenue longer-term?

So, I can give you a qualitative answer. We usually do not break down the forecast, but in these specific areas, in some of the applications we pursue, we are displacing incumbent. In some other applications we pursue, we basically go into new opportunities where our customers open the playing field for newcomers as they develop their next generation products.

Not very different from semi in that sense because it's -- again, it's a design win business. In many of those applications, the product is not off-the-shelf product; it is either customized or a slightly derivatized product. And it can take between a year to 18 months to get designed in and qualified. And that's why we made the comment that the design wins we saw in Q2 in basically mass spectrometry and life science applications, would contribute incrementally to our revenue in 2017.

Okay, that's helpful. Tom, I have a question on your guidance. Kind of -- if I did the math, it implies you should have, what, 100 basis point expansion in your gross margin or that your OpEx is improving in 3Q? Can you help us out, how do you arrive -- you go EPS or more [1 point] in your operating margin guidance --?

Sure. We have -- sure. Thank you, Edwin, for the question. We have a good operating -- we have good leverage in our operating model. So as the revenues go up, we cover our fixed costs, we have better absorption in our manufacturing, but the same holds true for operating expenses.

A lot of our operating expenses are fixed, so we do have leverage in the near-term. And that's the way I would look at it. You know, I'll address our model because I can anticipate, based on your report this morning, that that's the second question.

But the way we view this is, as in the near-term, yes, we do have leverage in the model; we are operating above our guidance range of the 20% to 25% operating margin. Then when we look at that, that range is for the long-term. And the good news is, hey, we are investing in R&D, we are investing in sales and marketing, and we're getting additional revenues.

For instance, this quarter, we opened a service facility in China. Our goal is to put our service resources close to the fab, and that helps to drive the revenues.

The other factor to consider longer-term is that there is good business out there that has lower operating margins. And we don't want to set an artificially high hurdle for ourselves and have to not look at those opportunities. So, near-term, yes, we're operating well to our model. There is leverage. And long-term, that's where we see it going.

All right. So that kind of ties into my last question. So, if I do the math, your 3Q guidance already puts your EPS at $3 on annualized rates. That's less than $500 million revenue run rate, so why not update the EPS target, long-term EPS target?

Well, now, that's a good point. We're getting to our aspirational goals quicker than we laid out, and that's a positive.

Edwin, this is Yuval. We have a very structured and rigorous strategic planning process, which we are now in the middle of, the 2016 strategic planning process. At the end of our process, we will update our three years' aspirational goals, and that's how we operate.

Okay. That's helpful. Thank you.

Thank you, Edwin.

(Operator Instructions). Pavel Molchanov, Raymond James.

Hey, guys, thanks for taking the question. Following up on a comment that you guys just made about kind of the optionality of M&A, given that your margin structure is, in fact, running at or above the high-end of your targets, is there in a realistic prospect of M&A that would support the continuation of that -- of your current margin structure? Or is pretty much anything that you could possibly look at it would be below average versus the existing business?

That's a good question. So, yes, there are opportunities, target companies that have similar margins to us. That said, though, our hurdle, or one of the things we look at with a potential targets, is somebody that has an operating margin in the low to mid-teens, but coming into our models with synergies in global sales, synergies in the supply chain, that we can raise them up to the 20%.

So, yes, there are those that are equivalent. In general, we are looking for people we can get up to the 20% margin range.

Got it. And then kind of just a quick one on the SG&A line item. Several quarters of SG&A kind of flat to down, and then it kicked up by about $1.3 million sequentially in Q2. Should we expect that $19.4 million to be kind of the next run rate? Or should it tick back down?

Generally, it's ticking -- it will be ticking up the second half of the year, maybe a little below that. We did have some expenses for a very positive activity -- our service center in China. But generally, expect [S&M] dollars to increase [19] -- probably a little on the high side for the quarter. That's how I would model it.

All right. Appreciate it, guys.

Thanks, Pavel.

Thank you, Pavel.

(Operator Instructions). And I am showing no further questions at this time. I would like to hand the call back to management for any closing remarks.

Thank you, everybody. Thank you for joining us today and we look forward to seeing you at the upcoming events. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.