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Edited Transcript of AEIS earnings conference call or presentation 31-Oct-17 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Advanced Energy Industries Inc Earnings Call

FORT COLLINS Oct 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Advanced Energy Industries Inc earnings conference call or presentation Tuesday, October 31, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anne M. Leschin

StreetSmart Investor Relations - Principal and Founder

* Thomas Liguori

Advanced Energy Industries, Inc. - CFO, CAO and EVP

* Yuval Wasserman

Advanced Energy Industries, Inc. - CEO, President and Director

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Conference Call Participants

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* Amanda Scarnati

* Edwin Mok

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Patrick Ho

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Sreekrishnan Sankar

BofA Merrill Lynch, Research Division - Director

* Thomas Robert Diffely

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Weston David Twigg

KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Advanced Energy Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Annie Leschin, Head of Investor Relations. Ma'am, you may begin.

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Anne M. Leschin, StreetSmart Investor Relations - Principal and Founder [2]

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Thank you, operator and good morning everyone. Welcome to Advanced Energy's Third 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'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, goal or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties 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 Forms 10-Q, 10-K and other forms filed with the SEC.

In addition, we assume no obligation to update the information that we've provided you during this call, 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 remember, in today's call, we will also be referring to GAAP and non-GAAP results. Non-GAAP measures exclude the impact of 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 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?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [3]

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Thank you Annie, good morning everyone and thank you for joining us for our third quarter earnings conference call. Our 7th consecutive quarter of strong performance is a direct result of our ability to consistently deliver the highest quality, mission-critical, precision power solutions to our customers during this exciting and demanding period across all our product lines. It takes an incredibly talented global team and a world-class operation working in concert to capitalize on this extraordinary time in our business.

Our singular focus on creating the most advanced power conversion technology to address our customers' next-generation products and technologies remains our #1 priority . Our commitment to constant innovation and tight customer engagement has allowed us to grow our leading position in the industry and once again post strong results for the third quarter. With an upward trend lasting nearly 2 years, the semiconductor business sustained its record level this quarter, while our Industrial business surged ahead, led by thin films, which had their highest quarter in 5 years.

Total revenue climbed to nearly $177 million, while non-GAAP earnings per share reached $1.19. Having generated $34 million in cash, we ended the quarter with $370 million, having completed a $25 million share repurchase and the acquisition of Excelsys. Our appetite for inorganic additions to our product and technology portfolio remains robust with an active pipeline of potential acquisitions.

In semiconductors, our advanced plasma processing products again enabled our business to continue at near-record pace. Growth of 44% year-over-year highlighted the accelerated demand for 3D NAND amidst the ongoing technology upgrades occurring throughout the industry. Demand for solid state drives and higher mobile content for handset drove the recovery in DRAM, while the ramp of 1x nanometer foundry logic also contributed.

As the era of big data and artificial intelligence take hold, fab capacity expenses are driving the wafer fab equipment market to new highs and requiring more complex tools to address these advanced technologies. The semiconductor industry is facing exponential increases in data generation, greater complexity across virtually all end markets and higher capital intensity.

For example, as we learn from our OEM and end-user customer, 64-layer 3D NAND is 60% more capital intensive than planar, while 14 to 16 nanometer DRAM is 40% more intensive than 25 nanometers and 7 nanometers logic is 100% more intensive than 28 nanometers. New materials and device structures are enabling these technologies. As device architectures become more complex with smaller geometries, more advanced processes, such as selective atomic layer deposition and atomic layer etch are necessary to accurately build device features. AE's position as an enabler is becoming even more critical to OEM customer road maps, as semiconductor manufacturers struggle to achieve acceptable yields of these higher complexity devices.

In the fourth quarter, we look for semiconductor revenues to increase over the third quarter, with memory in undersupply and fab utilization rates running high, capacity expansion in 3D NAND and DRAM is continuing. Coupled with recent CapEx increases, the wafer fab equipment industry is pointing towards an uptick in the fourth quarter and strength heading into 2018.

Our Industrial business had a strongest quarter in 5 years, climbing 36% over last year. In thin film applications, capacity expansion and demanding processes for consumer products coating drove the need for high performance process power requirements. We saw increased advanced power technology adoption in China for this functional and decorative coatings ahead of the holiday season. The significant recovery in glass coating this year helped bolster new capacity buys for coaters this quarter, adding to the large number of technology upgrades of existing lines across all regions. In the flat panel display, mobile wallet share gains in Korea contributed to the strong results with volume shipments of new advanced pulse DC technology.

This quarter, specialty power products reached record level with strength from high voltage power solutions for mass spectrometry and scanning electron microscopes and power control modules for glass, solar cells, and lithium-ion battery applications. Coupled with full quarter contribution from our Excelsys acquisition, we are driving expansion across a strong and diverse customer base and outperforming our markets.

We also added 3 new Rockwell channel partners, enhancing the distribution of our industrial product portfolio. Our long-term goal is to grow the industrial business at GDP plus 2 to 3 points. Year-to-date, we are substantially exceeding that with growth of 32% for the first 9 months. Given the collection of adjacent markets, an application that comprises this business, the timing of capital investment can cause fluctuations in any given quarter.

After the significant build-up we experienced in advanced coding capacity for consumer devices,, we anticipate a decline in revenues for the fourth quarter, as factories transition to volume production and prepare for the holiday season. With the market share gains we are making with new products and applications, we expect to continue to see year-over-year growth in the fourth quarter.

At AE, investing in innovation remains a core component of our strategy. Integral for increasing our role as an industry leader, the investment we make each and every quarter are deepening our relationship with our customers and ensuring that we are designed into the road maps across end markets. This quarter we increased our investment in demonstrations and evaluation units that we supply to both existing and new customers. In China, for example, we are seeding the market with our latest Ascent portfolio for consumer products coating to put AE technology into our customers' hands early in the development process. As a result, customers are realizing the benefits in real world applications and we are gaining a better understanding of the requirements for pilot production in anticipation for market trends. We see this as an important part of our philosophy to invest for the future by bringing innovative new products to market and expanding our SAM.

In semiconductors, AE is enabling the applications that are driving the migration to more advanced memory and logic, such as plasma processes. Our continuing design wins are helping to ensure our growth, as the industry migrate to 10 nanometer technology and below. Our customers span geographies from North America to China, Korea, and Japan. This quarter, we won all of the design we pursued in advanced memory and logic application. Some of the most notable included a PEALD design for memory devices with an RF power solution, an etch design for a next-generation platform for advanced memory in sub-10 nanometer logic ,as well as a high voltage application. These design wins should transition into mass production roughly 1 to 2 years from acceptance, to reach high volume manufacturing and secure our growth well into the future.

Overall, we are gaining traction in a variety of industrial applications, markets, and geographies. In thin film industrial, we're gaining share in China with new and existing product penetration, including last quarter wins this quarter. Advanced products and technology products led to share gains in mobile OLED, solar PV, and consumer products coating, as process demands continued to grow.

In specialty power products this quarter, we secured thermal and PCM design in petrochemicals, PV solar wafer coating and furnace for thin film lithium-ion battery materials. We continue to win designs and grow in high voltage applications, including mass spectrometry, scanning electron microscopes, and X-ray, mainly due to our superior performance, providing a low ripple, stable power for high sensitivity metrology applications. Recent additions to our portfolio of low voltage, high-density configurable solutions have expended our SAM, leading to design wins in the medical, life science and analytical equipment applications as well.

Our service business continues to excel, having grown 28% year-over-year in the third quarter to yet another high. Increasing effectiveness in deploying our strategy and serving our customers throughout the life cycle of our products is proving invaluable in this exceptional semiconductor environment. With utilization rates running high and end customer pushing to improve yields on increasingly complex processes, OEM service volumes are growing significantly, benefiting AE as well. Our close relationship with OEM customers and highly engineered service products are driving a sizable portion of our growth, total market share gains.

Recent expansion in China and Japan have positioned us closer to Asian customers, allowing us to serve them more quickly and cost-effectively. Together, these trends are resulting in an acceleration in our service revenue across the globe. Looking at the fourth quarter, we expect to see moderate sequential growth.

In summary, we are on an accelerated trajectory to meet our aspirational goals. Our vision to capitalize on emerging demand drivers and balance investment with sustainable and profitable growth remain intact. Multi-year inflections are driving the industries we serve and reinforcing our perspective that our markets are becoming stronger. By engaging with our customers early in the development process and providing the most innovative products, we are staying at the forefront of this evolution.

For the fourth quarter, we anticipate the growth in semiconductor business will largely offset the fluctuation in the industrial business, as we maintain overall revenue run rates close to the third quarter. Long term, as we look to maintain our trajectory of sustainable growth and outpace the markets we serve, we are committed to continuing to expand our portfolio, re-distribute our capital and achieve our aspirational goals.

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 right now to Tom. Tom?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [4]

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Thank you, Yuval. In the third quarter, we successfully executed on our growth strategy, exceeded our top line expectations and delivered strong bottom line results. Total revenue came in at a $176.6 million, up 6.5% sequentially and up 39.5% from a year ago. Non-GAAP operating margin was 31.9% compared to 31.8% in the second quarter and 29% last year. We also completed the acquisition of Excelsys and repurchased $25 million of stock. Our semiconductor business remains strong and our industrial and service businesses set new records this quarter.

Semiconductor sales of $116.5 million remained at near-record levels, as the capital equipment industry met the demand for more complex tools required for next-generation technology. This quarter, industrial revenue reached $35.9 million, up 36.6% from last quarter, driven by industrial coating capacity expansions and the acquisition of Excelsys.

Service revenue for the quarter was $24.2 million, an increase of 7.2% sequentially, as OEM service volume increased due to higher fab utilization rates. Non- GAAP operating margin of 31.9% was similar to last quarter, and a 290 basis point improvement over last year's 29.0%. Year-to-date, as sales have grown 41%, operating expenses have decreased significantly as a percent of total revenues, reflecting the leverage in our model, driving more to the bottom line.

This quarter, we had a one-time tax benefit of $40 million related to the solar inverter business. Excluding this, our tax rate would have been 15.9% for the quarter. For 2017, we anticipate an annual tax rate of approximately 12% to 14%, excluding this one-time benefit. Longer term, we expect the tax rate to be in the mid-teens, reflecting the geographic mix of our global operations.

Due to the one-time tax benefit, GAAP EPS for the quarter was $2.09. Excluding this, GAAP EPS would have been $1.09, compared to $1.14 in the second quarter. In the second quarter, we benefited from an exceptionally low tax rate, resulting from a significant number of stock options exercised by employees. Similarly, non-GAAP EPS for the quarter was $1.19, at the high end of our expectations compared to $1.22 in the second quarter.

Turning to the balance sheet. We generated $33.7 million of cash from continuing operations during the quarter. We ended the quarter with $369.6 million in cash and marketable securities, after using $25 million to buy back stock as part of our ongoing share repurchase authorization and $17.4 million for the purchase of Excelsys.

We continue to keep our focus on driving operational efficiency. Over the last 2 years, we've made sizable improvements in our working capital management. While there will be some fluctuations quarter-to-quarter, our net working capital days decreased by 5 days year-over-year to 72 days in the third quarter.

Overall, with another solid financial performance this quarter, we are making significant progress towards our longer-term strategic and financial goals. Our ongoing investments in innovation and key acquisitions are expanding our addressable market and leveraging our cost model. All this while consistently returning value to our shareholders.

With that let me turn it over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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

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Edwin Mok, [2]

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So first I have on the semi side, Yuval you highlight a couple of good win rate for new wins that you guys talk about. And then also you guys have good exposure to the end markets. Just curious, is there a way to kind of think about how those win rates translate to revenue? I know that you mentioned it could be a few years out, just time from win to design. But maybe a good way to think about it is -- is there a way to think about what win rate you guys have won before and how that translate to your revenue now and any kind of metric or color you can provide around that?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [3]

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Edwin, this is a great question. What's I think new right now in the semi industry is that the pace of changing from one technology, I wouldn't even call it node, but one technology tool set to the next one is accelerated. And what we see is end use customers moving from one memory generation to the next. There is a new set of tools that are being developed, especially in the 3D NAND, when you have really accelerated growth in the complexity of the devices and aspect ratios. The increase in aspect ratio requires a different power distribution for etchers, that will be able to effectively go all the way down to the depth of the trenches of the contacts. That requires either new set of power supplies or derivative of existing power supplies. And the interesting thing about this generation of the era we live in right now is that the pace of adopting these new tools is much faster, which require from us a very strong engagement with our customers from an early stage to ensure that they have their tools ready when the fabs are ready to start the production for the next node or next memory device. So yes, there is an acceleration and we believe that in semi the transition of these design wins into mass production is faster than what we saw in the past. When we talked in the script, we talked about the 1 to 2 years adoption to mass production. That was mainly the industrial section.

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Edwin Mok, [4]

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I see, okay great. That's interesting -- helpful color. And then since you mentioned Industrial, I have a question around that. You mentioned that thin film was a big driver this quarter and you expect a pullback in the coming quarter. Sometimes the thin film market can become lumpy. Is there any risk that that could be -- we could have with this low level thin film spending for a few quarters, until sometimes maybe 3, 4 quarters out before we have an high jump, or how do we kind of think about that?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [5]

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So specifically this, in Q3, also Q2 this year, we enjoyed a significant growth in our thin film, especially hard coating and optical coating business, driven by consumer electronic products. And obviously these products usually are geared towards mass production before the holiday season. So our revenue in Q2 and Q3 was especially geared for building the capacity in the factories that make those devices. Q4, obviously, there will be less investment in equipment for these factories, as they move to mass production. We expect to see resumption of the investment in capacity next year as these factories are geared for next-generation devices and we have enough indication to believe that we will continue to grow in the area of hard coating, optical coatings and decorative coating for consumer products. The other thing that is very interesting, we are becoming the standard. As we start be an enabler for highly engineered advanced materials for consumer products coating, many companies end-use customers are adopting our technology, because we have been proven to deliver on this unique set of new materials that are going to market. So we see a propagation both with technology nodes migration and the new investment in capacity, but also expanding our footprint and serving more customers as they're adopting our technology.

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Edwin Mok, [6]

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Okay, great that's helpful. Last question I have, just on capital allocation and I guess around M&A. You guys have talked about working through an M&A pipeline and so far you've done 1 deal, smaller deal. Just curious, any update on that pipeline, do you expect to anticipate any kind of transaction to happen, let's say, in the next 12 months? And I noticed that you bought back $25 million this quarter. Since you're generating good level of cash, why not buy back more stock?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [7]

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So we do have a very active pipeline of target acquisitions. As you know and we talked about it very openly, we're very structured and very disciplined about how we do this. We have hurdles that we want to make sure that, that all the opportunities have to meet. And we expect to see additional acquisitions happening in the next few quarters. Our shares repurchase is not in lieu of acquisitions, it's something that we have put in plan more than 1.5 years ago, and we continue to pursue that in a way that allows us to manage our share count, but also to time these buybacks effectively. So these are not competing efforts, but rather complementary efforts. Regarding the acquisitions, we do have in the pipeline both small and large acquisitions. We're expecting to continue to pursue those. The way we look at our acquisitions is very strategically, they have to be a good fit in terms of the application space, in terms of the product and technologies they bring, and in terms of the operational make-up of these companies. Tom do you want to add anything to that?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [8]

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No, thank you Yuval.

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Operator [9]

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And our next question comes from the line of Krish Sankar with Bank of America.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [10]

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I had a few of them. Yuval, if I look at your semi revenue compared with your closest peer, MKSI, for the last 5 years you guys have actually outgrown. I mean kudos to both of you for having outgrown the WFE, but on a relative basis, your semi revenues have been -- the growth has been better than MKSI for the last 5 years, but this year it looks like it's relatively slowing compared to MKSI. So I'm kind of curious, is there something going on in terms of market share or is it just a timing issue?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [11]

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I don't think it's timing and I don't think it's market share issue. I think that when we look at these 2 companies and MKS is a good company, but when you compare the 2 companies, it's not apples-to-apples. Right? The product portfolio of MKS is very different from ours. And if I rely on third-party analysis, we continue to lead in market share, our market share I think is maybe 2.5x that of MKS. We are a pure play power company. And if you look at our revenue growth, compared to previous quarter, we did better than MKS and compared to last year, we did better than MKS. So we continue to outperform. We continue to grow. I think the 1 thing that may skew the picture optically is that I think their product portfolio has dramatically changed after the acquisition of Newport. So I think that we -- it's difficult to compare apples-to-apples, because the companies have totally different portfolios.

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [12]

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Krish, I would add, I think if you look at our guidance going forward, we're forecasting up versus some of our peers flat-to-down.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [13]

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Got it, all right. And then a couple of other questions. Did you guys say what the gross margin the industrial and services business was in Q3?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [14]

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No, but you can see it is actually -- it was very healthy, it was a little over 49%. It's in our income statement in the press release.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [15]

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Okay, got you. Alright. And then 1 other question is, is OLED as a percentage of total revenue still under 5% at this point?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [16]

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OLED continues to be small. Although we continued to gain share for the applications we serve, it's a small sliver of the total pie of revenue for AE.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [17]

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Got it, got it. And then the last question I had is, if I look at your customers, like AMAT and all these guys on the display side, or even OLED side, they have really long lead times, almost close to a year and they have a pretty good visibility into 2018. How does their long lead time translate into your shipment schedule?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [18]

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Their lead time doesn't really affect our -- as you know, we have just-in-time arrangement with our key customers. We don't have long lead time products for them. They pull our product when they need them.

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Operator [19]

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

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [20]

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First, just wanted to follow up on the tax situation. I think the rate for 2017 increased this quarter from the guidance last quarter, I think the guidance was around 9% and now it's 12% to 14% for the year. Just wonder if you could help us understand what's moving around in the tax line, a little bit better.

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [21]

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Yes, our tax rate went up. We had a change in the geographic mix, but more importantly, we made some changes internally. We had some inter-company sale of assets from one entity to another, things that we thought really better positioned us for the next 3 years and part of the strategic plan. And associated with that, in the quarter, there were some additional tax on those transactions. So I think the way I would look at tax, is the way we look at it long-term is use a tax rate -- we model a tax rate in the mid-teens and that continues to be a good number, hopefully it's a conservative number.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [22]

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Okay, that's helpful. But just also wondering if you could help us understand maybe some of the semiconductor demand trends and your expected industrial growth rate for 2018. So just looking out into next year, what you're seeing?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [23]

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Let me respond to that qualitatively. We expect the semiconductor business to continue to grow. We expect the first half of next year to be higher than the second half of this year. We expect the next quarter -- I mean we expect Q4 to be stronger than Q3 and Q1 stronger than Q4. Beyond that, we're not -- we don't have enough visibility to quantify that. When it comes to the industrial part of the business, we originally aimed at growing at GDP plus 2 to 3 points. We're demonstrating much stronger than that. Obviously, we enjoy from this very large investment in coating for consumer electronic products. What we expect to see going forward will be a continuing growth in the industrial. We believe that we will continue to grow faster than the markets we serve.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [24]

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Okay. So industrial growth maybe ahead of that GDP plus 2% to 3%?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [25]

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That's correct.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [26]

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So, still next year, okay. And then finally, if you have any thoughts on operating margin trends into 2018, that would be helpful. I know that it's been bouncing around a lot, but it's been running quite high, it could be impacted by M&A, but if any color into 2018 will be helpful.

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [27]

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Sure, really no change in our model. We expect gross margins to be flattish. The way we view the gross margin line is that we give our customers price concessions and our job is to get supply chain savings to offset those. And that's why those will be flat, though we continue to get some leverage in the operating expenses. So when you look at the total model with operating margin, yes, there continues to be volume leverage potential and I think you saw this in the current quarter, our gross margin, because of mix, was down about, I think, 30 basis points, but our operating margin more than made up for it and was actually up 10 points.

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Operator [28]

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

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Amanda Scarnati, [29]

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Just kind of continuing on the industrial acquisition pipeline, when you look at kind of growing that business, you mentioned 2 to 3 points above GDP. I am assuming that means excluding any acquisitions that you do. Are you still on track to hit that $150 million in acquisitions target by the end of 2018 or is that sort of [internal brake] it's a little pushed out, or less confidence in hitting that target at this point?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [30]

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Amanda, we are confident that we can achieve that within the next -- the 3 years window we declared. We do have active pipeline of acquisitions. The growth rate we talked about at GDP plus 2 to 3 points was obviously an organic number. As we acquire in the industrial domain, we expect to accelerate the growth.

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Amanda Scarnati, [31]

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Are you seeing any sort of increased competition in your acquisition pipeline, or has it kind of been the same over the last year or 2?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [32]

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Not really. What we see in general, in general we see higher valuations that we saw 2 or 3 years ago. Obviously, the environment is more robust and the multiples are more frothy. So we are very careful in the way we look at our acquisitions. The last 5 acquisitions we have made during the last 3 or 4 years, all of them are very successful, accretive, contributing to profit, into cash flow and growing. So that's what we would like to do, is to continue to adhere to our very rigorous method of scouting, scoping and acquiring and integrating businesses, because at the end of the day, it's all about growth, we want to buy businesses and grow them.

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Amanda Scarnati, [33]

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And then just on the Excelsys acquisition, how much revenue did they contribute this quarter and did you see any sort of impact on margin in your industrial business because of that acquisition?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [34]

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Sure. Little over $3 million of revenue and that's pretty much the run rate, accretive to earnings.

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Operator [35]

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

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [36]

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First 1 about industrials in the context of your aspirational targets. I remember at the start of this year you were talking about kind of in the medium term getting industrials to 1/3 of total top line, but this past quarter, which was a standout quarter for industrials, it was 20%. So barely half of kind of what you guys are targeting. So are you -- is it still realistic for you to get to 30% plus Industrial weighting, or are you perhaps kind of rethinking that percentage?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [37]

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We still adhere to that aspirational goal, and we believe that we're very realistic. This is not a short-term goal Pavel and it's a long-term goal.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [38]

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Okay. And then on taxes. So I'm assuming you're giving your guidance in the context of the status quo. If we were to get tax reform along the lines of what the speculation is 20% U.S. corporate rate, what would that mid-teens company blended rate, how would that change for you guys specifically?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [39]

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It would have a smaller impact, it would be a benefit too Pavel, but it's not going to be drastic. We already have a very good tax structure. I would add that this benefit we took, the way to think of that is that it's similar to an NOL. So we're going to pay less cash taxes than reported going forward and that's going to help increase our cash flows. So we put a lot of time and effort on this tax structure. We believe it's very solid compliance wise, which is really important to that. And when we look at tax reform, things like repatriation, that's great, things like lower tax, that's great. So -- but we have to wait and see what the proposal is, correct?

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Operator [40]

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

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Patrick Ho, [41]

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Yuval, first in terms of your services business, you've seen your customers also kind of involved in that business area themselves where they're trying to add more value for their customers, and you talked a little bit about that on the call today. Given the gross margin improvement we've seen, can you give a little bit, or an example, of some of the changes on your services end, where you're trying to provide more value-added for your customers?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [42]

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Okay, the first -- thanks Patrick -- the first value-add we bring to our customers is shortening the distance from us to them by placing new repair facilities in some strategic areas. Two examples, Jian in China, we have a new repair lab in the technical/technology trade -- free trade zone that allows us to significantly increase our responsiveness, reduce turnaround time and reduce the cost of logistics and freight and duties. That's tangible value for our customers. We have a similar investment active lab that we opened in Tachikawa in Japan. That is doing the same thing. So this is more of the repair aspect or part of the service business. In addition, we continue to offer our customers, which we call the non-break fees solution, it's highly engineered upgrades, retrofits solutions and products that extend the lifetime of our legacy products, that increase the capability and the performance of products that are already installed in field, and the result of that, reduce the total cost of ownership for our customers and their customers. So it's all basically value-driven and for that reason, we see an increase in our market share as we get more and more repair and business revenue coming back to us and away from the third-party repair shops.

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Patrick Ho, [43]

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Great, that's helpful. And maybe as a follow-up, the strength in the semi business that I also believe will go into the early parts of 2018. You gave quite a bit of visibility that typically a lot of times component suppliers don't usually get. Is that changing with you and your customers? Are they giving you more lead times than you've seen in the past? And I guess most importantly, from your end, how do you react as they extend some of the lead time for you?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [44]

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It is different, Patrick, and I cannot give you details, but in general I can give you -- we received formal notices from almost all of our customers, asking us to be ready for the ramp. And it's not a big surprise, we're expecting to see continuing ramp, at least through the first half of next year. And we have a very effective, very agile and nimble operation. We do not see any challenge to address the needs, both in terms of volume, mix, and delivery time.

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Operator [45]

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Our next question comes from the line of Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [46]

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Yuval, just back to your prior comment, you said your OEM customers are asking to be ready for the ramp. Your Q3 semiconductor revenue was up by more than 40% on a year-over-year basis. So can you help us understand what do you mean by the ramp?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [47]

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Ramp means increase quarter-over-quarter.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [48]

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Okay. So is that more than just a single-digit growth that you have [guided]?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [49]

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I can't give you specific numbers Mehdi. All I can tell you that we have indications coming from the market that we should be ready to increase our delivery and capacity of product. Basically the number of units we ship every will increase going forward.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [50]

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Okay. You have a pretty good insight into the 3D NAND technology that has enabled you to outgrow revenue by a significant factor compared to the overall WFE's band. In that context, how do you see the evolution of 3D NAND, especially with stacking of the stacks? Is that going to change the power supply content for you, or is that neutral, the stacking of the stacks?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [51]

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It's a good question, Mehdi. The answer is yes. What we are seeing, as the industry goes into more layers in the 3D NAND, as I mentioned earlier in the first question, the aspect ratios are becoming very challenging and they require, in many cases, higher power, better control, and very sophisticated way to pulse the RF power to be able to process these very challenging architectures. In addition, we see additional applications driven by new materials and new process technologies. All in all, what we see is increase in the power density delivered into the chambers, and with that more complex power supplies, which will drive potentially higher ASPs.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [52]

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But does that change with the number of stacks, is there a maximum number of layers above and beyond which --

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [53]

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It changes with the increase in number of layers. But obviously, Mehdi, a really strong function of the architecture of the chamber itself. And if we look at the top 3 or 4, actually the companies they do not have the same architecture and the same design. So depends on the actual process chamber architecture. You will see a change in the power content delivered, as the devices become more challenging.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [54]

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Okay. One more question here, just a clarification. Would you see a scenario in the next 1 or 2 years that your customers would actually -- the end customer would actually stack more than 2 stacks?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [55]

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I don't know really. I don't have enough knowledge of that.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [56]

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Okay. And then looking at the overall trend, it seems like based on what your OEM customers have elaborated or discussed, WFE could grow at the growth rate of, like, 5% through the turn of the decade, and given what he has done over the past few years, would it be fair to say that you can grow your semiconductor revenue at 3x that growth rate looking forward?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [57]

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I don't know. In general, we have demonstrated our ability to grow faster than the markets we serve. Our aspirational goal is to continue to do that. The last time we presented publicly, we talked about our CAGR for the last 4 or 5 years was 17%. So double-digit growth rate in this environment is not out of question.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [58]

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Is there any technological change that could make your growth rate more or less, so that we could think about growth rates that would be above or beyond the historical trend rates?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [59]

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Well, we continue to invest significantly in innovation and in new technologies for the next generation power distribution for plasma processes. Some of these new technologies are being evaluated right now. We believe if the adoption rate will be fast and we will continue to remain the enabler for the industry, we may see acceleration of growth. But it depends on the success of these technologies and the adoption.

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Operator [60]

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And our next question comes from the line of Tom Diffely with D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [61]

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Wanted to dig a little deeper into the capital intensity, how much you made Yuval in your prepared remarks. You talked about -- I think it was a 100% increase in capital intensity from [28 down to 7]. Was that just a broad industry number or was that for your tools?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [62]

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Broad industry number.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [63]

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Okay. And I would assume with your etch growing as a percentage and then the complexity of etch in your power supplies on there that you have a faster or higher capital intensity growth rate.

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [64]

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It's an assumption. Again, our product intensity, the power content is not only a function of the migration to a next node like, say from 28 nanometer to 10 nanometers, but also is the increase in the stacking of the films in memory and the adoption of new materials. For example, we see the acceleration of adoption of new technologies like atomic layer deposition or atomic layer etch. These are new technologies that will be incremental in terms of the growth. I mean, 5, 10 years ago, people didn't use the atomic layer deposition extensively. So we will see the adoption of new materials and new process technologies as another accelerator. And that will increase the capital intensity.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [65]

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Okay. And then moving over to the services side of the business, it sounds like we put a lot of effort into gaining some share from the third-party players in services. Curious on the 28% year-over-year growth, how much of that do you think as you recapturing some share versus just the growth of the marketplace for services?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [66]

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We do not delineate that. I think it's a combination of a fewer thrusts in our strategy, the market share gain away from third-party shops by providing value and we care for our customers, and the incremental growth coming from new service products that we develop in our service engineering department.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [67]

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Okay. And then maybe just finally here on the thin film growth. Just trying to understand a little bit how that's been driven. Is it technology changes and what the customers doing, is it just need for more capacity, or is it -- you mentioned share gains there as well?

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [68]

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It's really both. You'll find out that a lot of products that you and I use almost every day that historically used to be coated using liquid films or chemical coating, are moving into vacuum coating, which is PVD mainly. And as the technology moves forward, new devices adopt new materials and new techniques for coating. And the main purpose for that is to provide the color, the surface feel and look of the film, of the product. Films that are anti-smear, anti-scratch films, et cetera. So these are new engineered materials. So it is not only capacity, it's also new materials and new methods for depositing these materials and that drive a lot of growth right now.

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Operator [69]

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(Operator Instructions) And we do have a follow-up question from Krish Sankar with Bank of America.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [70]

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Two quick ones. Yuval, how much was AMAT and LAM as a percentage of total sales in Q3?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [71]

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Krish, it should be in the Q that was filed, that is probably 52%, 53%.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [72]

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And then it looks like you have about $75 million in the buyback left. Is it true, and if so, is it open-ended or is there a time frame for it?

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Thomas Liguori, Advanced Energy Industries, Inc. - CFO, CAO and EVP [73]

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The specific authorization Krish, expires in March of '18. That said, we're in discussions with the board to either extend or replace that. So going forward, for capital deployment you should expect both acquisitions and share repurchases.

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Operator [74]

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Thank you. And I'm showing no further questions. I'd like return the call to management for any closing remarks.

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Yuval Wasserman, Advanced Energy Industries, Inc. - CEO, President and Director [75]

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Thank you everyone for joining us today. As you can see, we're excited about the current and the future. We were very constructive both -- in all the markets we serve and we're very excited about the future. We hope to see you -- many of you soon. Take care.

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Operator [76]

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