Advanced Energy posted second-quarter revenue of $442 million, up 21% year-over-year and above the high end of guidance, with EPS of $1.50 up 76% as data center computing revenue surged 94% on ramping hyperscale design wins. Industrial and medical returned to sequential growth for the first time since 2023, though semiconductor revenue slipped sequentially and the full-year semiconductor growth outlook was cut to mid-single digits on tariff-driven order timing, China softness, and slower DRAM. Management raised its full-year data center growth outlook to over 80% while flagging tariffs as a roughly 100 basis point gross margin headwind.
Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy Industries' Second Quarter 2025 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 today's earnings press release and presentation on our website at ir.advancedenergy.com. Before we begin, 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 guaranteed for 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, August 5th, 2025, and the company assumes no obligation to update them. Any targets beyond the current quarter presented today should not be interpreted as guidance. 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 infrastructure and other transition costs, restructuring and asset impairment charges, and unrealized foreign exchange gain or loss. Detailed reconciliation between our GAAP and non-GAAP results can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.
Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. Second quarter revenue exceeded the high end of our guidance range, driven by strong demand for Advanced Energy Industries' data center power solutions. We also benefited from increased demand in industrial and medical, posting our first sequential growth in that market since 2023. On a year-over-year basis, second quarter revenue grew 21%, our third consecutive quarter of year-over-year growth. Earnings per share also came in at the higher end of guidance. Our business diversification strategy, which is focused on three distinct target markets, is driving more consistent profitability and cash flow. We have been mitigating cycle risk by participating in multiple growth markets, each with its own characteristics. The strategy is playing out nicely this year, with our success in data center compensating for softness in industrial and medical.
Semiconductor has performed well for AE, with mid-single-digit growth expected this year after a growth year in 2024. Our improved profitability and cash flow are allowing us to make the technology and capacity investments necessary to fuel long-term profitable growth. These investments give confidence to our customers that Advanced Energy has the technology roadmap and manufacturing expertise necessary to support their long-term success. In data center, our high-efficiency, high-power density products have proven ideal for AI applications. This year, we have won a number of next-generation programs, which are expected to support further growth in 2026. In semiconductor, customer interest in our EVOS, eVerest® RF plasma generator, and NAVEX platforms is very strong. We expect to more than double revenue from these platforms in 2025, as initial wins go into early stages of production.
We believe that these wins will drive revenue growth in 2026 and beyond, as leading-edge fab processes ramp to volume. In industrial and medical, we've invested heavily in new products, a new website, and a robust sales and channel effort. The result is that we have secured a record number of design wins, some of which are turning into revenue this year. Looking forward, we expect that these wins will accelerate our growth in I&M, allowing us to gain market share. In addition, with the closure of our last China factory in June, we are making good progress on our Gross Margin Improvement Program. We continue to expect gross margin to approach 40% exiting 2025. Now, let me provide some comments on tariffs. The tariff environment continues to be very dynamic.
Actions we are taking to mitigate the impact of tariffs include qualifying products in our Mexicali facility under USMCA, leveraging our geographic footprint, and finally, optimizing our supply chain and logistics. We will continue to work with our customers to mitigate costs as the environment evolves. Now, let me provide some color on each of our markets. Second quarter semiconductor revenue was solid. Although revenue was down sequentially, it grew double digits year on year. On the new product front, we had another quarter of robust EVOS and eVerest shipments, as some early design wins began the transition to low-volume production. These transitions are important milestones, validating the progress our customers are making with their end customers. During the second quarter, we also secured two new significant etch and deposition wins for leading-edge processes.
Customers valued the capabilities of our new technologies, as well as our ability to quickly tailor solutions to meet their process requirements. In data center computing, revenue jumped nearly 50% sequentially and almost doubled year on year, as we ran hyperscale design wins and captured increased demand. We believe this new level of demand will continue for several quarters to come. In addition, we have already won a number of next-generation designs, which are scheduled to ramp in 2026. Our primary focus in this market continues to be serving our key hyperscale customers with leading-edge solutions. We also see an expanding set of AI-related opportunities at enterprise and other customers, where we could leverage existing technology blocks to quickly deliver solutions. We expect these new opportunities to drive incremental growth in 2026 and beyond. In industrial and medical, second quarter revenue grew sequentially but was down year on year.
I&M total backlog grew this quarter for the first time since the beginning of 2023. In distribution, which accounts for roughly half of our I&M revenue, sell-in and resales increased quarter-over-quarter. Channel inventories decreased for the fifth quarter in a row. These encouraging data points support our view that AE's I&M revenue will continue to improve from this point forward. On the design win front, we secured wins in medical imaging, robotics, process control, and Millero. Our digital marketing investments are also yielding results. Since launching our new website in late 2023, we have secured over 300 I&M design wins, which originated as website inquiries. Our partnership with key distributors is also expanding our ability to reach a broad set of small and medium-sized I&M customers. Telecom and networking revenue was flat sequentially.
During the quarter, we won a next-generation telecom design that leveraged our leading position in this market. In addition, we see AI driving new opportunities for us in networking. Now for some closing thoughts. We are capturing opportunities in a dynamic market environment, and are delivering upside to our expectations for the year. Following the strong second quarter, we expect to operate around this new higher level of revenue in the second half, resulting in an overall 2025 revenue growth of approximately 17%. In data center, based on higher demand levels and the success of our new products, we now expect to grow revenue over 80% in 2025. Semiconductor revenue is now projected to grow mid-single digits in 2025, with revenue from our next-generation plasma power products expected to double.
In I&M, after an extended correction period, demand is recovering, with a stronger order book driving higher sequential revenue in the second half. Looking beyond the near term, we are very excited about our growth prospects. With a strong customer pull for our new products, we are well positioned to gain share. Our efforts to structurally improve manufacturing costs are yielding tangible results. We remain confident in our ability to achieve our gross margin goals despite added tariff costs. Finally, we continue to actively pursue our acquisition strategy and have a solid pipeline of potential opportunities. Paul will now provide more detailed financial information.
Thank you, Steve, and good afternoon, everyone. Second quarter revenue of $442 million was just above the high end of our guidance, driven by upside in the data center computing market. Gross margin improved slightly quarter-over-quarter and was in line with our target despite several headwinds. Operating margin increased 110 basis points sequentially as we grew revenue faster than operating expenses. As a result, we delivered earnings per share of $1.50, up 76% from last year and at the highest level since 2022. During the quarter, we continued to execute our new product strategies, added capacity to meet growing data center demand, completed final production in our China factory, and strengthened our capital structure. Now let's review our financial results in more detail. Second quarter total revenue was $442 million, up 9% sequentially and 21% year-over-year.
Revenue in the semiconductor market of $210 million was up 11% over last year, but down 6% sequentially. Q2 semiconductor sales declined slightly more than anticipated as we saw customers shift delivery schedules to mitigate the near-term impact of tariffs, partially offset by higher service revenue. Data center computing revenue was $142 million, up 47% quarter-over-quarter and 94% year-over-year. During the quarter, we captured upside demand for our new data center power solutions. Industrial and medical revenue of $69 million increased 7% sequentially, but was still 13% below last year. We believe this market has passed the bottom given increased backlog, improved customer inventory, and encouraging data points from our distributors. Telecom and networking revenue was $22 million, flat quarter-over-quarter as anticipated. Gross margin was 38.1%, up 20 basis points sequentially, despite increased tariff expenses and production ramp costs.
We were able to partially offset these headwinds by taking actions to manage our manufacturing costs on higher volumes. We're encouraged by the progress we're making on gross margin improvement, as excluding the impact of tariffs, gross margin would have been over 39%. Operating expenses were $104 million, up $5 million from last quarter on higher spending on new product activities and annual salary increases. However, OpEx as a percent of revenue declined almost 100 basis points sequentially and 260 basis points year-over-year, demonstrating the leverage in our model. Operating income for the quarter was $65 million. Depreciation was $10 million, and our adjusted EBITDA was $74 million. Other income increased sequentially to $2 million, primarily due to higher investment income in our deferred compensation plan.
For Q2, our non-GAAP tax rate was 15.3%, below our estimate of 19% on favorable mix of earnings, better visibility for optimizing the impact of the global minimum tax, and favorable discrete items. As a result, second quarter EPS was $1.50 per share, compared to $1.23 in the previous quarter and $0.85 a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the second quarter were $714 million, with net cash of $147 million. Cash decreased $10 million sequentially as we took advantage of market volatility and repurchased $23 million of our common stock at an average price of $83.83 per share. Cash flow from continuing operations was $47 million. Inventory turns were flat sequentially at 2.7x, but total inventory of $398 million was up 8% sequentially, driven by the strong increase in demand.
This increase was more than offset by higher payables, with DPO at 63 days. Receivables increased about 10%, or $27 million on higher revenue. DSO was flat at 62 days. During the second quarter, we paid $4 million in dividends and invested $28 million in CapEx. The higher capital spending is consistent with our expectation of increased investments over the next several quarters to support growth in the data center market, infrastructure capability, and our factory consolidation strategies. Despite increased working capital and CapEx, free cash flow in Q2 grew 21% sequentially. In addition, during the quarter, we extended the maturity date of our undrawn credit facility of $600 million from September 2026 to May 2030, while maintaining substantially the same favorable terms as our 2019 agreement. Before moving on to guidance, let me provide more color on the impact of tariffs on AE.
The tariff environment continues to be very dynamic, making the overall impact difficult to predict. For Q2, tariff costs were higher than we initially expected. However, we are implementing multiple mitigation strategies with our customers that should help reduce the tariff impact. Combined with other operational actions, we continue to believe that we are on track to achieve our long-term margin and operating goals. Looking forward, the expected impact of tariffs as we understand them today is incorporated in our guidance. Turning now to our guidance. Following our very strong Q2 results, we expect Q3 revenue to be similar to Q2 and for Q4 to grow sequentially. This outlook would translate to approximately 17% growth for the year. We expect Q3 semiconductor revenue to be down slightly versus Q2 based on customer forecasts.
Given first-half results and our updated outlook, we now project semiconductor revenue to grow mid-single digits in 2025. For data center computing, we expect demand to remain at or above Q2 levels in the second half. As a result, we've increased our 2025 annual growth projection for data center from 50% to more than 80%. We believe the industrial and medical market has passed the bottom and expect modest sequential growth in both Q3 and Q4, paced by the impact of tariffs on the broader economy. Telecom and networking revenue should remain in the low $20 million level. As a result, we're forecasting our third quarter revenue to be approximately $440 million, ±$20 million. We expect gross margins in the third quarter to improve to around 38.5%, mainly driven by the initial benefits of the closure of our final China factory.
As we realize the full benefit of the factory closure and improved factory efficiency, we expect gross margins to be between 39% and 40% exiting the year, including the impact of tariffs. We expect operating expenses to be up slightly on higher variable costs, given the stronger full-year performance. Other income should return to the $1 million range. The tax rate is expected to be 17%-18% on optimization of our model going forward. As a result, we expect Q3 non-GAAP earnings per share to be $1.45, ± $0.25. Before opening up for questions, I want to highlight a few important points. We participate in solid growth markets that can operate on different cycles, which should enable us to deliver more robust and consistent financial results over time.
We believe increasing demand in data center, technology investments in semiconductor, and market recovery in industrial and medical will drive overall revenue growth for Advanced Energy Industries in 2025 and 2026. In addition, we continue to have strong design win momentum driven by our leading-edge products, which we expect to enable us to outgrow our markets. From a profitability perspective, we grew revenue second quarter 21% year-over-year, but we grew EPS 76%, driven by gross margin expansion of 280 basis points and the overall leverage in our model. This performance demonstrates the opportunity for AE to accelerate earnings growth as we improve margins and increase revenue going forward.
Beyond the benefits of exiting China for manufacturing that will fully kick in by Q4, we believe further production efficiency and new product mix will enable us to continue to achieve our long-term margin and financial goals, despite the higher cost of tariffs. Lastly, with a solid balance sheet and strong cash flow generation, we will continue to look for strategic acquisitions to add scope and leverage our scale. With that, we'll take your questions. Operator?