Advanced Energy Industries Inc (AEIS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Advanced Energy Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the floor over to Annie Leschin, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Advanced Energy's Second Quarter 2017 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 participating in the KeyBanc Global Technology Leadership forum on August 7 in Vail, Colorado; the D.A. Davidson Technology forum on August 15 in New York; and the Dougherty Institutional Investor Conference on September 19 in Minneapolis. As other events occur, we'll make additional announcements.

And 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 believe, expect, plan, objective, estimate, anticipate, intent, 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 on our estimates, reserves or allowances, as well as other factors listed in our press release. These and other risks are described in Forms 10-Q, 10-K and other forms filed with the SEC.

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

Aspirational goals and targets discussed on this conference call or in the presentation material should not be interpreted in any respect as guidance. And just as a reminder, in today's call, we will refer both to GAAP and non-GAAP results. Non-GAAP measures exclude the impact of cash, noncash-related charges such as stock-based compensation and the amortization of intangible assets, as well as nonrecurring items such as acquisition-related costs. A reconciliation of our non-GAAP income from operations and per share earnings is provided in the press release table. We will be referring to earnings slides posted on the Investor Relations 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 Earnings Conference Call. Our result this quarter exceeded expectations on both the top and bottom lines. Semiconductors led the way as AE outperformed the broader wafer fab equipment industry, industrial growth continued in all sectors and service surpassed historical levels. In total, revenues grew 40% year-over-year to $166 million and non-GAAP earnings per share climbed 67% to $1.22, driven by strong non-GAAP operating margins. We generated nearly $64 million in cash during the quarter, and once again, demonstrated the success of our model to deliver during very high growth period across our business.

More recently, we made a small acquisition that strengthened our specialty power portfolio and expands our TAM in key markets. The nearly 50% year-over-year increase in our semiconductor business experienced in the second quarter exceeded initial expectations, leading to another record performance.

Semiconductor revenues reached $117 million in the quarter, driven by the acceleration and expansion of 3D NAND capacity, DRAM in 1x nanometer logic to high volume and the recovery in DRAM spending. Additionally this quarter, we saw accelerated pull-ins from selected customers of both existing and legacy products. We also began high-volume manufacturing and shipping of our Navigator-II FastCapsolid-state match product, reflecting our expertise in RF power and early collaboration with customers to address their needs and challenges for advanced etch applications. Business from all our OEMs grew substantially in the quarter, as the wafer fab equipment market remained robust worldwide. For example, we had a record quarter in Korea, where our sales to local OEMs increased over 100% from last year's second quarter. The value we're creating for our customers as a critical component supplier can be seen in the success of our semiconductor design wins and share gains.

This quarter, we won the majority of the designs we pursued primarily in advanced memory, logic and PEALD applications. We saw strength across multiple geographies, including North America, Japan and Korea. In China, we also secured designs with indigenous wafer fab equipment companies. By engaging locally with the global customers very early in the design process, our technology plays a critical role in enabling them to perform very sophisticated and complex processes. These wins are the direct results of our continuing innovation and commitment to maintaining our industry leadership position in Precision Power Solutions for critical applications.

AE's semi business continued to outperform the wafer fab equipment industry with double-digit CAGRs in the last few years. The primary reason for this is a compounding effect of the complexity of plasma process technology with the sophistication of power supplies demanding different levels of performance, such as RF pulsing supplies that require advanced measurement, power conversion and power control. This has resulted in the growing capital intensity, as the number of deposition and etch process steps increases and more power supplies per chamber are needed, doubling our SAM as the industry moves from planar to 3D.

We remain confident that 3D NAND will be the biggest driver for the semi cap markets in AE over the next few years, with demand still well ahead of current capacity. We expect this to be aided by the ongoing ramp of foundries and logic to be of 7-nanometer capacity, additional DRAM spending and potential demand from China, as well. With the growing complexity of FinFET and the challenging architectures of 3D NAND with an increased number of layers, we expect deposition and etch to continue to outpace other wafer fab equipment segments.

These trends favor enabling technologies such as AE's Precision Power Solutions. Looking at the third quarter, we anticipate semiconductor revenues will be slightly below our record run rate as a result of the pull-ins we saw in the second quarter and customer shipment and installations timetable. We expect second half of 2017 semi revenues to be equal or higher to the first half; in longer term, anticipate continued high level of growth in semi.

On the heels of a significant rebound seen in the beginning of the year, growth continued in the second quarter across our industrial business, as revenue grew 19% over last year. All of our targeted thin film industrial markets increased this quarter led by the capacity ramp of advanced industrial coating for consumer electronics. Capacity expansion is also underway in the glass coating market, which drove demand for new coaters, as well as retrofits and upgrades of existing lines.

Additionally, flat panel display was fueled by the mobile OLED ramp. In Specialty Power, we saw a recovery in the broader industrial markets in EMEA, which contributed to strong PCM sales in manufacturing applications, especially glass float lines. As activity in glass increased across regions, we expanded our product offering in North America by delivering our first integrated power system for a glass formation project. We also saw a number of high-voltage opportunities in emerging mass spectrometry, life science and analytical applications.

This quarter design wins in our industrial business centered primarily on the glass market. In the thin film industrial, wins included glass coaters in the U.S., China and Japan, where our technology is being increasingly adopted, as well as a successful evaluation of power solution for co-sputtering to enable the formation of engineered materials with improved film qualities.

Other thin film wins include, PVD applications for OLED with a new mid-level power level platform that is gaining traction. In Specialty Power, our thermal PCM business had a strong quarter driven by build out of glass formation capacity. While these capital investment cycles tend to be lumpy, we are seeing a sufficient number of projects to absorb current capacity, leading to another wave of investment for glass float and coating. Additionally, we also secured a variety of high-voltage designs in life sciences for technical applications that should increase our SAM and generate revenue going forward, as the enabling technology starts to take hold. These include mass spectrometry, genomic cell separation and capillary electrophoresis.

Looking ahead, we expect to see a strong third quarter for the industrial business. With strength throughout our markets, thin films should accelerate due primarily to demand for advanced industrial coating and new glass coaters, while our recent acquisition of Excelsys adds to our specialty power business. Excelsys is a small well-known DC power supply company with a strong established presence in certain markets, including medical, laser drivers and other industrial applications.

Their power supplies fill in our portfolio with lower power, high-density configurable solutions for critical applications and are entirely incremental and compatible with Advanced Energy's. Recently, Excelsys launched a new product line without cooling fans. This is a significant advancement, resulting in better reliability, fewer failures and virtually no particles generation, which is advantageous in clean room environments such as in medical or semiconductor applications.

Another important feature is the ability to configure these products in the field, which is a clear competitive advantage, accelerating time-to-market of new designs. We see this as strategic acquisition that expands our scope and brings domain expertise with applications in channel resources. With AE's scale, global presence and supply chain management, we believe that we can take this growing business to the next level.

This acquisition is part of our ongoing strategy to grow and diversify our industrial business. We remain focused on increasing our TAM in Precision Power Solutions for critical applications in highly regulated markets. These include new and adjacent markets such as medical and analytical equipment, aerospace and defense. The advantage of these markets is that similar to semiconductors, once designed into a product, a company becomes a preferred supplier for the long term. With a pipeline of actionable targets that we look to progress this year, we see this most recent acquisition as the first step towards our goal of adding $150 million to $200 million in industrial revenue over the next 3 years.

Service revenues grew to record level in the second quarter, increasing 10% sequentially. Growth accelerated this quarter, as we responded to surges in demand and continued to execute on our proven strategy to give service in an aftermarket business rather than just a support function. Incremental revenue from highly engineered aftermarket products, including upgrades and retrofits, is capital to be used in extending the life of older equipment. With our optimized approach, we're deepening our relationship with customers and lowering their total cost of ownership.

Looking ahead, we anticipate growth in the mid-to-high single digits, as we gain market share from third-party repair shops and continue to expand our engineered service solutions. In line with our successful strategy to remain intimately close to our served market and our customers, we have invested in and opened 3 new locations in Asia. Our new aftermarket business centers in Xi’an, China, and in Japan are improving our proximity to customers in Asia to provide the highest quality and most responsive services. In Singapore, we're also establishing an important new center of excellence for plasma processing, close to our key customers operations and to the Asian markets in general. This center will include R&D, service and support, customer operations and logistics.

In total, this was an exceptional quarter as AE fired at all cylinders, demonstrating the strength of our organization and the flexibility of our model to deliver during a period of unprecedented growth. This, while also successfully executing on an acquisition that added to our specialty power portfolio, expanded our TAM and is already contributing to our top and bottom line.

With a strong balance sheet and strong pipeline of acquisition targets worldwide, we look to achieve our goal of adding $150 million to $200 million in industrial revenue over the next 3 years. Looking ahead to the third quarter, we expect the growth and diversification of our industrial business to more than offset the temporary pause in semiconductors, as we maintain our recent overall record revenue run rate.

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'd like to turn the call over to Tom. Tom?

Thank you, Yuval. From a financial perspective, we had an exceptional quarter. We continue to excel on the top line while maintaining our cost structure and margins, both of which drove significant profitability. Total revenue was $165.9 million, up 11.1% sequentially and 39.7% from a year ago.

Non-GAAP operating margin was 31.8% compared to 31.9% in the first quarter and 27.8% last year. We generated $64 million in cash from continuing operations. Our semiconductor and service businesses set new records in the second quarter, and our industrial business continued the sequential acceleration. Semiconductor sales increased 11.8% quarter-over-quarter to $117 million, as our customers' need for increased power content grew. Service revenue grew 10% sequentially, reaching $22.6 million as we accommodated the wave of demand.

Our industrial business climbed 8.6% to $26.3 million, as all segments of the market performed well. Recently, we added to our industrial business with the strategic acquisition of Excelsys. We acquired Excelsys in an all-cash transaction for EUR 15.5 million or approximately USD 18 million at current exchange rates. Excelsys 2016 audited revenues were EUR 10.2 million or approximately USD 12 million at current exchange rates. Beginning in the third quarter, Excelsys will add to our top line and be accretive to our bottom line. Non-GAAP operating margin of 31.8% was similar to last quarter and a 400-basis point improvement compared to 27.8% last year. We continue to benefit from business process and system improvements that allow us to leverage our infrastructure as we scale our business.

This quarter, these initiatives resulted in a more efficient order cycle process, which also benefited our working capital and reduced our days sales outstanding. The tax rate for the second quarter was 3.8%, as there were a significant number of options exercised by employees which resulted in sizable tax benefit. For 2017, we anticipate a tax rate of approximately 9%. Longer term, we continue to expect the tax rate in the mid-teens, reflecting our anticipated mix of business by geography.

Non-GAAP EPS for the quarter was $1.22 compared to $1.04 in the first quarter.

Turning to the balance sheet. We generated $64 million of cash from continuing operations, and ended the quarter with $380.8 million in cash and marketable securities.

This included $17.7 million in restricted cash related to the acquisition of Excelsys. Cash flow benefited from both increased profitability as well as lower working capital investment, specifically receivables, as we worked with customers to streamline order and payment processes. As a result, DSO declined by 13 days. With a significant portion of our cash held overseas, we entered into $100 million line of credit to fund domestic operations and acquisitions. Our goal is to ensure that we have the flexibility to quickly and seamlessly transact M&A initiatives, whether domestic or international.

In conclusion, our second quarter results demonstrated that we're making significant progress to our longer-term strategic and financial goals. Our ability to manage rapid top line growth, while continuing to invest in R&D to expand our technology leadership, has resulted in first half 2017 profitability levels that are on track to surpass our aspirational EPS goal. We continue to work on business opportunities and initiatives to further grow and optimize our business over the longer term.

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

(Operator Instructions) Our first question comes from the line of Edwin Mok with Needham & Company.

So first question I have on the pull-ins that you mentioned from selected customer, and you pointed out that, that's part of the reason why you expected September quarter to be down, right? So demand's pretty strong right now and the pull-ins suggest strong demand, and you expect second half to be flat or even up a little bit from the first half of the year. What visibility do you have for -- beyond this quarter and even beyond that, to give you confidence to say that second half is going to be flat or up from the first half?

Sure. Thanks for the question, Edwin. The pull-ins we saw in the quarter are a combination of things. Number one, our customers are planning and adjusting their material shipments for key components to match their delivery cycles and plans. That basically indicated the need for more components that we anticipated. Obviously, since we have a just-in-time type of relationship with our key customers, they pull the product when they need it. The other component of the pulling had to do with, as we mentioned, some of our legacy products. As we continue to evolve and migrate our customers to next-generation products, we retire older generation products. And in some cases, customers choose to stock inventory of older generation products for future use of older technology. That happened, as well, in the second quarter. So the combination of 2 drivers caused Q2 to be much higher than we had anticipated. Looking at the second half, we expect the second half to be as good or better than the second half (sic) [first half]. And the key drivers are simply because of the, number one, the underlying demand for the plasma processing equipment that we serve is still there, and it's not going down. As we discussed in previous conversations, we may see periods when quarters are not -- all quarters are not on a straight line and there's some digestion period driven by installation timetables and deliveries. But overall, if you look at the end user's investment plans, some of them have not been fulfilled yet for this year, we assume there will be investment in the second half in both logic and memory. And right now, based on information that we see coming from our customers and end users, we expect to see fairly strong Q4, and in general, equal or stronger second half. And then, by the way, Edwin, that's semi, right? Obviously, we're talking about semi.

Yes. Obviously, yes. I understand that. So that's very helpful color regarding the semi business. When you move down to industrial, seems like you're pretty successful in the glass area and it will leverage your prior relationship to [cost out] more power control modules [than other product in the cost] area. Can I ask you, that said, what's driving growth in the glass area right now? Is it a lot of it driven by the flat panel display market investing? Or is it the other driver for the glass market that drive this growth?

That's a great question, Edwin, because it will allow me to explain the difference between glass and flat panel displays. When we talk about the glass business -- the industrial glass business, there are 2 industrial spaces that we serve that are linked to each other, but are very different in the scope. The first one is glass float, which is the manufacturing of glass from sand, right? It's a very energy-consuming process where a lot of power is being consumed to melt the key ingredients and then create the native glass. This specific application is served by our power control modules product line. Obviously, most of the glass that is used for architectural applications is coated with low-e films that ensure that these high-rise buildings that are glass coat -- created do not turn into green houses. And these films are coated using very large PVD machines. And for this application space, we sell our AC and DC high-power supplies. Now this is an interesting field because there is an advancement in the process technology that is applied for architectural and low-e glass to ensure that the right color and the right UV filtering are taken care of successfully. Now what's happening right now, right now every big city I'm driving through, all I see is cranes. And obviously close to us, you drive through Denver, you'll see the sky is basically filled with cranes. There's a lot of constructions and most of the high-rise buildings are glass buildings. So there is a huge increase in consumption globally for glass and glass coating, and that's basically what we see is driving the demand for additional glass formation line and glass coating lines. In many cases, companies choose to put these factories side-by-side to make sure that they don't have do shuttle glass pieces between a forming factory and coating factory.

Okay, great. That's helpful. Tom, I have a question around margins. If I look at last 2 quarters, you guys have delivered in the high-end of your margin range, right? Is there reason to believe that you cannot deliver in the high-end in the September quarter?

No. We're doing very well on our operating margins and, we think, with higher volume, it will -- there's leverage left in our model. So sure, our pricing environment is the same, our cost structure is very similar and things are in the right direction on margins.

Okay, that's helpful. And then, I guess, the last question I have, just coming back to the industrial, the Excelsys acquisition. How much of your guidance come from Excelsys? And is that all going to be reported in industrial or some of that goes into semi cap, too?

It's mostly industrial. Last year they had -- well, we had with Excelsys now, USD 12 million revenues. It's growing so in that range, Edwin, and it's accretive.

And our next question comes from the line of Joe Maxa with Dougherty & Company.

I'm just wondering on the service gross margin took -- dipped a little bit in the quarter, maybe give us some puts and takes on that line, and where you see that going?

Yes, there is one product line that had lower gross margin. It's a product that we've done very well with sales and there is a scheduled maintenance. And because of the location of the customer base, it's slightly lower gross margins. So the service team on that, Joe, has developed a new service plan. And we expect those service margins to get back into the high 40%, possibly not Q3, but by the end of Q4.

Oh, that's helpful. By end of the year. And then you talked a little bit about seeing some success -- initial success in China. I'm just wondering if you can elaborate on that and what your expectations are?

Okay. Obviously -- are you talking about success with indigenous companies?

Right, correct.

Right. So we're lucky to be a local company in China. We have more than 700 employees in China, in general. We're a local player. We have an engineering capability locally, service and support. And we were engaged with a lot of the startup companies that were created in China, especially in the wafer fab equipment industry. And being local and close to them, we continue to work with the local companies on design wins. And as we mentioned in the prepared remarks, we're making great progress in securing some applications, both for deposition and etch in China. Getting ready for the growth we anticipate to see in China semi industry, we continue to expand our local footprint. And for that reason, we have opened recently our customer support center in Xi'an in the, basically, technology center there, very close to our customers and their customers. We expect to see China as an important hub for us, both for semi and industrial applications. And we continue to expand and invest in China both in sales, marketing, support, engineering, R&D and manufacturing.

Okay. And one last one would be on your -- just want to touch base on your aspiration goals of greater than $4. You're well above that now. What's your take on perhaps updating those goals?

Sure. We're in the middle of our strategic plan, Joe, and we'll be updating those at the end of the year or beginning of next. As we said at our Analyst Day, that $4 aspirational goal is 4 quarters in a row, and we want to see it on year-end report. So we feel really good that we're on one very solid footing on track to hit that. And I think if we look historically, 2 years ago or so, we were at $2; last year, we were little bit over $3; now we're at $4; and obviously internal, our activity is focused on what's next? What's the next step function there? So, yes, things are going very well with our earnings.

And our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. (Operator Instructions)

Can you guys hear me?

We can hear you better now.

I had a question. When you look into Q3 and beyond, or let's just say Q3, if your semiconductor sales are going to moderate and the industrial grows, could your gross margin grow in September versus June?

I'm sorry. Say that one more time, please.

The mix change between semi and industrial, will that impact our gross margins?

Well, industrial, in general, has higher gross margins.

Yes. Our industrial margins are higher than semi. So in case the mix changes, we have more industrial, we expect to see more uplift in margins.

Now I think on the operating expenses, there's more customers, there's more OpEx, so they're pretty neutral, equal on the operating margin line.

Right, right. You got it.

That's very helpful. And then how much was AMAT and Lam, as a percentage of sales?

We filed the Q today. It's in there. I don't have it off hand.

I think it's in the Q.

Got it. All right. And then the last question, you guys mentioned, like the goal is to add $150 million to $200 million in industrial revenues over the next 2, 3 years. Where is the industrial -- out of the industrial revenue, how much is the high voltage going to be in there?

High voltage is not the only area of focus when it comes to our inorganic growth. Obviously, we continue to focus on power conversion and precision power applications for critical applications in highly regulated industries. So high voltage is one component of that. High voltage has been an interesting market for us because it's very fragmented and most of the companies serving the high-voltage market today are small and privately owned. It has been an area of interest for us. And we will continue to pursue that market. But in addition to that, there are other power applications that we find very interesting in the industries we mentioned earlier. And that could be DC to DC power supplies, AC to DC, RF, et cetera.

Got it. Got it. And then last question. I mean, if I look at the midpoint of the guidance for September, it's roughly flat sequentially. And you said semi might be down a little bit. So is it fair to assume that the acquisition is probably contributing a couple of million dollars -- a few [handful of] million dollars offsetting semi decline?

Yes. The industrial is growing and the addition of Excelsys.

It's not only the acquisition of Excelsys. It's a combination of the acquisition plus growth in industrial.

And our next question comes from the line of Amanda Scarnati with Citi.

I just have a question on the services side of the business and maybe a little clarification, Yuval. What is the life cycle of the typical power component? Yuval, I think you mentioned earlier in the call that you tend to retire some older products and you've been seeing some sort of build up by customers in holding those. If you retire those products, is there any concern going forward in replacing them if the components last a little bit longer than expected?

No concern. But let me give you a little bit of background. The lifetime of our products, it's really interesting, some of our products -- models have been in the market between 15 to 20 years. And they're successful. They are mature. And they are being used in various applications. Obviously, with copy exactly atmosphere in semi, we see some older design -- older node technologies continue to use legacy projects. What we do, however, a combination of obsolescence and the offering of new advanced solutions to allow our customers to extend the life cycle of their capital equipment or to repurpose the capital equipment to advanced nodes. We replaced these old models with new models. Obviously, they have more capability, they have higher ASP and they do have higher margins. So part of that product lifecycle management is to continue to chop the long tail of the legacy products and give birth to new products that are more powerful, more capable. Now with these products in the field, obviously the installed base is enormous because people continue to use the capital investment they have deployed years ago, which allows us the service opportunity to following things: number one, repair and maintenance; number two, upgrades and retrofits of older products to more capabilities and more sophistication, either by hardware or software or both; and also, replacement of older products in the field with new products. What we do right now in the service organization is focusing on generating more service products and service offerings, beyond just repairing old equipment. And these new initiatives provide a lot of the incremental growth that you have seen recently, as well as share gain and increase in demand.

Okay. And then in terms of gross margin, this quarter revenue increased by substantially the last 2 quarters and margins have remained flat. Is that just a function of growing semiconductor business and lower margins there? Or is there anything else happening there? Are you giving away pricing, as supply materials become a little bit larger of a customer? Or is it really just a function of similar pricing but semiconductor is just growing?

Amanda, that's a good question. And you're right, we get cost savings from higher volume. And in general, we participate, we share those or provide them to our customers. We think that's a good thing to be doing. When you look at operating margins, just about all of that increase in the margins over the last year or 2 is leveraging the operating expenses. So gross margins, it's rather amazing. I think there's 8 quarters in a row, it's 52%. It hasn't changed. But that's why, as we get cost savings, we pass them on.

And the cost savings, Amanda, we get is by continuously working on our operation, driving efficiencies, reducing labor content, relying on a more sophisticated supply chain, which allows us to share some of these savings with the customers, as Tom said.

There was a question earlier on the 2 largest customers. They were about 57% in the quarter and year-to-date.

Both of them, combined.

Combined.

Sure. Is it fair then to assume that gross margins will stay roughly around this 52% range, but we'll continue to see improvements in operating margins, excluding any sort of acquisition that brings operating margins down?

Yes. I mean -- and the operating margins will vary with volume. So it will go higher, with higher volume.

And our next question comes from the line of Patrick Ho with Stifel Nicolaus.

First, in terms of supply chain management, obviously you guys have been doing really good job this year, particularly with the high demand and you talked about pull-ins. Can you give a little bit of color on some of the, I guess, the levers and the dynamics that are helping you not become a roadblock or hurdle for your OEM customers that are also very constrained at this time?

Sure, Patrick. Our operational model, we believe, is unique. Over the years, we have deployed the following key strategic pieces: Number one, we focus on final assembly and test. We believe that at a business that is as high-mix, low-volume as ours, the key to provide agility, nimbleness and flexibility is to be non-vertical, which means limit our operation and assembly to just final assembly and test. That obviously requires a strong supply chain. And we drive demand flow technology and we work with our suppliers to adopt the same philosophy of demand flow technology that we have, which basically allows us to have really good control over our trade working capital, as we do not fit on large inventories of raw material. In addition to that, as we continue to drive labor cost down and labor content down, we moved from dedicated production lines to mix line configuration, which means that our production lines can operate and manufacture randomly any product that they see coming through the flow. And which means that we do not have wasted time on set up. So it's a very high efficiency, very fast and very nimble operation. Obviously, that combined with a just-in-time philosophy with our customers, allows us to deliver our products when they need it. And luckily, we have been doing a great job with that, as was reflected in getting awards for the last 2 years based on our strength in operation. We are not the weakest link in our customers' shipment.

Great. That's helpful. And maybe as a follow-up question, you talked about some of the high-voltage opportunities ahead for you guys, and particularly, how fragmented that market place is. Given that you have a very strong position on the semiconductor equipment side of things, what are some of the other marketplaces where you see additional opportunity to increase your share or increase your presence in those markets? What are some of them?

Well, thanks for the question, Patrick. So obviously, we are a critical supplier of high-voltage power supplies for the semiconductor industry as well. And it goes through iron implantations, electron beam-based metrology and inspection and electrostatic chucks for wafer holding in vacuum chambers. Obviously, the immediate adjacent markets, the most intuitive adjacent markets for us are E-beam based other markets like skinning electron microscopes that go into analytical equipment and industrial SEMs and medical SEM. And beyond that, new areas that are very well suited to our unique core competencies in high voltage, and these are mass spectrometry, E-beam applications, as well as some defense and homeland security type applications. The uniqueness of our power supplies in high voltage is that they are high density power, which mean the footprint and the size of our power supplies is small. We have very, very stable power, very low ripple and very accurate power. All of the above allows us to lead in technology when it comes to measurement accuracy, the clarity of the image and in the scanning electron microscope, et cetera.

And our next question comes from the line of Weston Twigg with KeyBanc.

First, just wondering if you can comment on the DRAM recovery that you mentioned, and maybe also comment on how that drives second half strength?

Yes, obviously, we see investment in DRAM, as well. Obviously, it also influenced our Korean revenue because DRAM usually drives more Korean OEM content, as well as U.S. OEM content. We saw this investment continues. We also saw some re-purposing of some other memory capacity back to DRAM in Korea. And we believe that, that will continue as we stated earlier. The underlying demand is there and will continue to grow. What was the other part of the question? I'm sorry, Wes?

I was just wondering if the DRAM recovery helped your second half outlook, in terms of second half revenue being higher than first half? Or if that was still primary 3D NAND?

We believe that both will drive the second half as, well.

Okay. Also just, I was wondering, a moment ago you mentioned that operating margin should go higher with higher volume, but you had a good increase in revenue in the June quarter, but relatively flat operating margin. Could you just comment on the moving parts there? And should we expect that trend moving forward?

Sure. We had the -- so pricing environment pretty much the same, cost structure pretty the same. We did have the lower gross margins in the service, which was the function of the scheduled maintenance on one fairly high volume part. That was 60 basis points or so. So that would be the main reason. Without it, we would have been over 32%.

And our next question comes from the line of Pavel Molchanov with Raymond James.

On the cash balance, so it's obviously at an all-time high even with the $17 million to pay for Excelsys. But can you talk about the breakdown between U.S. versus overseas cash, particularly, given the line of credit that you decided that you need?

Yes, that's a really good question, Pavel. So about 2/3 of our cash is overseas. And generally 2/3-plus of our cash flow tends to go overseas. So with the line of credit, we wanted to really shore up the liquidity for domestic because, as you said -- you know, we have a pretty active M&A target list, and it has a fair share of international and domestic. And what the line of credit does, it really gives us, you can use the term, [truck], dry powder, liquidity with it, et cetera, to be able to move fast on acquisitions. Plus, it's just a good time in the credit markets and we've got fairly low cost 5 years LIBOR-plus 125, just seems like a good thing to be doing at this time.

Understood. And supposing that there were to be a repatriation tax deal in Congress later this year, where you could bring some money back in at a preferential rate, is that something that you would be inclined in doing?

Well, we have to see what the proposal is. This thing is changing. I would say, overall, hey, if that happens, it's very good for us and a lot of different companies. It would depend on those specifics.

(Operator Instructions) Our next question comes from the line of Tom Diffely with D.A. Davidson.

Yes. I guess, first a follow-up on the industrial glass commentary earlier. It sounds like there's lot of new capacity being put in place. But there any technology changes that also benefits you?

In the glass market?

In the industrial glass market, yes.

Yes, yes. What we see is the market is starting to adopt more sophisticated deposition technologies. And mainly, these are PVD machines -- sputtering machines, and the market is adopting 2 areas of technologies that will potentially result with the ability to deposit more advanced engineered films, but also provide the quality, the adhesiveness and the reproducibility and the position rate that is needed. One technology is bipolar power. And we see an adoption of our bipolar power supplies for some of these applications. And the other area is co-sputtering, where power supplies basically serve more than one target per chamber. And the ability to drive 2 foreign materials at the same time allows the user to mix the atoms, if you may, and create the desired film. So these are 2 areas that we see a need for advanced power supplies for advanced applications.

Okay, great. And then moving over to the semi side, I think earlier you talked about how your servable available market was about 2x in 3D NAND what it is in planar. I'm curious, though, what happens when the 3D NAND moves from Gen 1 to Gen 2 to Gen 3? Is there some way to kind of correlate the opportunity for you, as the number of layers increases?

So let me clear that -- I want to make sure that the message is understood. As the industry migrates from the planar to 3D, our SAM for this specific set of applications, more specifically deposition and etch, has practically doubled for these applications, right. Now as the industry goes from 64 to 128 or more layers of 3D devices, obviously, what we will see is 2 things happen. There will be need for many more steps with deposition and etch, but also because of the aspect ratio of these very, very deep trenches and deep holes and very high structures that are created on the surface, there is the need for more advanced power generation and distribution because of the need to go and etch and provide these processes in very high aspect ratio topography. So it's the number of films, the number of steps, the number of tools, but also the type of power supplies and power distribution to address your highly steep topologies.

Okay, so sounds like your multiplanar effect is continuing here?

We believe so, as we see a compounding effect of not only quantity, but also, the quality and the type of performance that is required.

Okay, great. And then finally, when you look at the Korean market and I think you said, 100% growth year-over-year. Is that representative of the market growth itself? Or is it more of a share gain story for you?

It's both.

Okay. What was the biggest driver would you say year-over-year?

I think some of the share gain we talked about is winning design wins. Some of the design wins materialize to mass production, 18 months to 2 years later after the design win. So I can give you 2 data points: Number one, VLSI Research from April this year indicated that Advanced Energy won, I think, between 2.5 points of market share in our served market. So we continue to gain share. At the same time, we continued to win design wins. In Korea, what we saw is a doubling of our revenue, driven by both capacity but also, realization of design wins that converted to high volume.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to management for any closing comments.

Thanks, everyone, for joining us today. We had a great quarter. Obviously, it's been a great period for us in the semi industry. We continue to benefit from our enabling technology. We look forward to continue with success, as we believe that the underlying demand is still there and we continue to be an enabler for many applications. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.