Advanced Energy Industries, Inc. (NASDAQ:AEIS) Q4 2023 Earnings Call Transcript
Advanced Energy Industries, Inc. (NASDAQ:AEIS) Q4 2023 Earnings Call Transcript February 6, 2024
Advanced Energy Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Advanced Energy's Fourth Quarter 2023 Earnings Call. [Operator Instructions].Please note, this conference is being recorded. At this time, I'll turn the conference over to Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Mr. Mark, you may now begin.
Edwin Mok: Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy Fourth Quarter 2023 Earnings Conference Call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. You can find our earnings press release and presentation on our website at ir.advancedenergy.com. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, February 06, 2024, and the company assumes no obligation to update them.
Any targets beyond the current quarter presented today should not be interpreted as items. On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excluded from our non-GAAP results are stock compensation, amortization, acquisition-related costs, facility expansion and related costs, restructuring and impairment charges, unrealized foreign exchange gains or losses and onetime tax benefit. Detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.
Steve Kelley: Thanks, Edwin. And to those on the line, thanks for joining the call. Fourth quarter revenue of $405 million met our guidance, while earnings per share of $1.24 surpassed our guidance. We delivered record cash flow of $85 million in the fourth quarter. Over the full year, we delivered record cash flow of $213 million by maintaining good profitability and reducing inventory. For the full year, we benefited from diversified end market exposure. Even though our semiconductor revenue was down about 20% in 2023. Revenue in our other markets, stayed flat. In total, our revenue declined roughly 10% in 2023, a significant improvement over our performance in previous semiconductor downturn. In the semiconductor market, we enjoyed record sales of high-voltage products in 2023.
We also achieved record revenue in our service business due to a growing installed base of subsystems in a broader portfolio of services. In our other markets, we achieved yearly revenue in the industrial medical space and successfully ramped a major hyperscale product to high volume. Across the company, we launched 20 new platform products in 2023. Many of these platforms are viewed by our customers as game changers. In semiconductor, we launched eVerest and eVoS for etch and deposition applications. In the industrial medical space, we recently launched NeoPower, our new flagship configurable power platform. We are working closely with our customers to adapt and customize our platform products to meet the specific requirements of high-value applications.
We achieved a record number of design wins in the semiconductor, industrial and medical markets in 2023, exciting new products, a motivated sales team and enhanced go-to-market strategies enabled these wins, which are a critical leading indicator of future growth. On the manufacturing front, we took advantage of softer loading to accelerate our factory optimization plan. We are executing a multiyear plan to consolidate all of our manufacturing into large factories in Southeast Asia and Mexico. Ultimately, we expect this consolidation to improve manufacturing efficiency and execution, and it's a key part of our effort to move margins above 40% in 2025 as markets recover. In the fourth quarter, we completed the closure of two small factories.
These closures were in addition to the Shenzhen factory we closed earlier in the year. Now I'll provide some color on each of our end markets. Fourth quarter semiconductor revenue increased 3% sequentially to $191 million, a bit better than expected. In the fourth quarter, shipments of eVerest and eVoS, 80 units increased sharply, and we are maintaining that strong pace in the current quarter. Customers are eager to evaluate the new technologies, which offer significant yield and throughput advantages for advanced process nodes. Also in the fourth quarter, we delivered an upgraded higher flow version of our MAXstream remote plasma source product. In the industrial medical market, fourth quarter revenue decreased 6% sequentially to $109 million.
Production ramps of new design wins partially offset macro headwinds. We continue to grow our industrial design win pipeline in the fourth quarter, securing wins in robotics, test and measurement, mill arrow [ph] and indoor farming applications. In the medical market, we won multiple designs in surgical and diagnostic applications. During the quarter, we launched our next-generation NeoPower family of configurable power supplies. Addressing the need for higher power in a smaller form factor, NeoPower offers best-in-class power density to our industrial and medical customers. Investments in the channel and our digital platform are helping to broaden our customer base and are expected to drive future market share gains in the industrial medical space.
We are doing a better job communicating our value proposition to customers across all of our markets. When customers buy from AE. They get access to leadership technology, quick-turn customization capabilities, a world-class manufacturing footprint and long-term service and support. Moving on to our data center computing and telecom and networking markets. Fourth quarter revenue from data center computing customers totaled $63 million, down 8% sequentially. The Softness in the enterprise market was partially offset by the volume ramp of our sole-source hyperscale product. Telecom and networking revenue was $42 million, up slightly from last quarter on strong year-end telecom shipments. Looking forward, we see broad-based market weakness in the first half of 2024, followed by second half improvement and further strengthening in 2025.
Softening demand in the trailing edge part of the semiconductor market, sluggish demand in the industrial medical market an ongoing weakness in the enterprise computing market are all contributing to a sequentially lower first quarter. Despite these short-term markets, our strategic focus remains unchanged. We will continue to invest in proprietary products and technology, and we will accelerate improvements in our operational efficiency. Our focus areas for 2024 include: first, maintaining the momentum we've built in new product launches and design wins. New products and technologies are at the heart of our plan to grow revenue and share in the coming years; second, we will continue to broaden our customer base and expand our presence at existing customers.
Our new website is the centerpiece of this effort. Since the site went live 6 months ago, our web traffic and engagement levels have more than doubled. Later this quarter, we will add e-commerce to the website making it even easier for customers to quickly evaluate our products. Third, we will continue to improve our operational efficiency and optimize our factory footprint. In addition, we will continue to control cost as we did in 2023. Finally, we have a strong balance sheet, and we'll continue to look for inorganic growth opportunities that make strategic and financial sense. Looking beyond 2024, I remain very confident in our plan to accelerate revenue and earnings growth as markets recover. We are focused on high-value markets with a great team of innovative scientists and engineers, supported by a highly focused sales, marketing and operations teams.
Paul will now provide more detailed financial information.
Paul Oldham: Thank you, Steve, and good afternoon, everyone. In the fourth quarter, we delivered revenue of $405 million at the midpoint of our guidance in a tightening environment. Good execution throughout the organization resulted in Q4 earnings of $1.24 per share at the higher end of our guidance range. In addition, we delivered record operating cash flow of $85 million and exited 2023 with cash in excess of $1 billion. As we projected, our backlog returned to a normalized level of $407 million. Given shorter lead times and the transition of many of our customers back to utilizing hub or jet bins rather than direct orders, we expect our backlog to remain a quarter of revenue going forward. Now let me go over our results in more detail.
Revenue in the semiconductor market was $191 million up 3% sequentially. Product revenue increased quarter-over-quarter to meet end-of-year customer requirements, partially offset by lower service revenue on low fab utilization. Sales into the industrial and medical market were $109 million, down 6% sequentially. As we began to see in Q3, increasing macroeconomic weakness impacted overall demand in Q4 partially offset by revenue from design wins we secured in prior quarters. Base center computing revenue of $63 million, down 8% sequentially. Our business in this market can be lumpy, and we continue to benefit from the ramp of the large hyperscale win we reported in Q3, partially offsetting further weakness in the enterprise server market. Telecom & Networking revenue was $42 million, up 2% sequentially due to end of year shipments to our telecom customers.
Fourth quarter gross margin was 35.7%, down 40 basis points sequentially, mainly on less favorable revenue mix. Premiums paid for critical materials approached normalized levels exiting the quarter. Based on the timing of costs flowing through inventory, we continue to expect to see the full benefit to gross margin in the next quarter or so. Operating expenses were $95 million, down 2.5% from last quarter and below our plan. Actions we took enabled us to reduce spending while continuing to invest in critical programs. This marks the fourth consecutive quarter that we reduced operating expenses in an inflationary environment. Operating margin for the quarter was 12.3% down slightly from last quarter on lower revenue. Depreciation for the quarter was $10 million our adjusted EBITDA was $59 [ph] million.
Non-GAAP other income was $5.2 million on higher interest income. For Q1, we expect our non-GAAP other income to be approximately $4 million to $5 million. During the fourth quarter, we recognized $18.1 million in restructuring expenses and impairment charges. This charge reflects actions we are taking over the next several quarters to optimize our factories and ongoing adjustments to operating cost structure. We believe these actions form the foundation of aligning our infrastructure to achieve our 40% gross margin target. On a GAAP basis, this quarter, we recorded a tax benefit of $21.7 million, largely due to a gain of $25.6 million. The gain resulted from the release of valuation allowance based on tax strategies we implemented to fully utilize previously trapped NOLs. This will also result in a net cash benefit over time.
On a non-GAAP basis, our tax rate for the quarter was 14.7%. For 2024, we expect our GAAP and non-GAAP tax rate to be approximately 16%. As a result, fourth quarter non-GAAP EPS was $1.24. Turning now to the balance sheet. Total cash increased by $59 million to over $1 billion with net cash of $129 million. In the fourth quarter, we delivered record cash flow from continuing operations of $85 million, mainly due to lower inventory of non-critical parts partially offset by investments in strategic inventories of long lead time critical components. In total, inventory came down $28 million or 9 days to 116 days, and inventory turn improved to just over 3 times. DSO increased to 63 days from 59 days largely due to timing of revenue and DPO increased today to 49 days.
As a result, net working capital decreased sequentially from 136 days to 130 days. During the quarter, we understood $14 million in CapEx and made debt principal payments of $5 million and paid $3.8 million in dividends. Before I move on to guidance, let me briefly review our full year results. In 2023, we delivered revenue of $1.66 billion, down 10% year-over-year. Semiconductor revenue declined 20% on the market cycle, but we outperformed many of our semi subsystem peers due to the diversity of our portfolio. Non-semiconductor revenue in aggregate was flat year-over-year, with record revenues in the industrial medical and telecom and networking markets offsetting market headwinds in data center computing. During the year, we saw improvement in material costs, and we accelerated actions to optimize our manufacturing print and improve efficiency.
As a result, despite lower volume, our 2023 non-GAAP gross margin only declined by 90 basis points year-over-year to 36.1%. In addition, we reduced our operating expense base with our year-end exit rate down 6% from Q4 of 2022 in a highly inflationary environment. Overall, 2020 non-GAAP earnings were $4.88 per share and adjusted EBITDA was $245 million. For the full year, cash flow from continuing operations was a record $213 million. We invested $61 million or $3.7 million of revenue in CapEx. And we expect CapEx to continue to run at approximately 4% of sales as we execute our plan to optimize our footprint and scale the company in preparation for growth in 2025. Turning now to our guidance. While our first quarter outlook reflects further market weakness, we are seeing some early signs suggesting market conditions will improve as the year progresses.
In semiconductor, we expect revenues in Q1 to be down high single digits on slower trailing edge demand with revenues improving in the second half driven by investment in leading-edge logic and incremental memory spending. We expect Industrial and Medical revenues in the first quarter to decline mid-teens sequentially as customers and distributors are very cautious in the near term. However, we expect improved conditions and revenues for opportunities to drive sequential growth later in the year. We expect data center computing revenues to be down mid-20% sequentially. As digestion of large programs we react [ph] in the second half of 2023 and ongoing weakness in the enterprise market impact revenues in the first half. However, we expect new wins and investments in AI applications to support some market recovery towards the second half of the year.
Lastly, we continue to expect our telecom and networking revenue to normalize to roughly $30 million a quarter within the next quarter or two. As a result of these dynamics, we expect first quarter revenue to be approximately $350 million, plus or minus $15 million. We expect Q1 gross margin to be approximately 35%, mainly due to lower partially offset by better mix and actions we are taking to improve our gross margin. We expect operating expenses to be flat to up slightly from Q4 levels with spending on R&D and other critical programs, partially offset by other reductions. As a result, we expect Q1 non-GAAP earnings per share to be $0.70, plus or minus $0.20. Looking forward, we expect second half revenues to be higher than first half and our Q4 exit rate to return to over $400 million per quarter.
Based on actions we are taking to accelerate optimization of our factory footprint, improve manufacturing efficiency and increase our mix of sole-sourced products, we expect gross margins to exit the year 250 to 300 basis points higher than our Q1 guidance. We believe this puts us on track to achieve our gross margin goal of greater than 40% at revenue levels in the mid-$400 million range per quarter, better than our previous model. Before I open it up for questions, I want to summarize some key takeaways. 2023 provided a solid proof point of our diversification strategy. Despite two of our markets going through cyclical downturns, we reported record revenues in our other two markets in several product lines. Our long-term investments from new products to channel strategy are yielding tangible results, and our focus in the industrial medical market has driven strong design wins and revenue growth in the market.
On the financial side, while we are not satisfied with our gross margin results in this challenging environment, we have a clear plan to increase gross margins and to drive earnings growth. In the meantime, we were successful in controlling our costs delivering record operating cash flow. Finally, our strong balance sheet gives us flexibility to pursue strategic acquisitions while maintaining multiple options to create shareholder value. Looking forward, we expect demand to increase in the second half of this year and further strengthen into 2025. We are improving our operational efficiency and anticipate gross margins to increase on historical revenue levels. Positioning us to reach our gross margin goal of over 40% and to deliver higher earnings than our prior peak as markets recover in 2025.
With that, we'll take your questions. Operator?
See also 20 Dating Sites with the Most Users in 2024 and 11 Best Hair Care Stocks To Buy Now.
To continue reading the Q&A session, please click here.
