ADVANCED ENERGY INDUSTRIES INC Q3 2025 earnings call

Thank you, Operator. Good afternoon, everyone. Welcome to the Advanced Energy third 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 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, November 4th, 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, unrealized foreign exchange gain or loss, and the dilutive effect of our convertible note due to the higher no-hedge strike price versus the initial conversion price. Detailed reconciliation between our GAAP and non-GAAP results can be found in today's press release. Please note that this quarter we added a new reconciliation for non-GAAP income tax and tax rate. 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. Third quarter revenue and earnings exceeded the high end of guidance, largely due to record data center revenue, which more than doubled year on year. Total company revenue increased 24% from last year, our fourth consecutive quarter of year-over-year growth. Strong revenue, solid execution, and cost savings from our China factory closure pushed gross margin higher. As a result, we delivered the second-best quarterly EPS performance in our history. This year's financial performance demonstrates the value of our market diversification strategy. By selling our industry-leading power technologies into a variety of high-end markets, we are able to generate more consistent profits and cash flow. Our markets don't generally move in sync, so there's a good chance that one or more of our markets will be strong at any given point in time.

This financial stability has allowed us to continuously increase our investments in new technology, products, infrastructure, and production capacity. These are the key enablers of our future growth. Sharing best-in-class technologies across our portfolio is accelerating our time to market. As an example, high-efficiency, high-density technology blocks created for data center applications have already been incorporated into several new semiconductor and industrial products. Another example is liquid cooling, a technology we perfected for plasma power applications. This know-how gives us an advantage in the data center market, which will eventually shift to liquid-cooled solutions as power levels increase. Our strong balance sheet allowed us to increase capital investment this year to capture upside demand. The payback on this incremental investment will be measured in months, not years.

In addition, our new flagship factory in Thailand, where we broke ground in 2023, is now ready to start production within months of a go signal. We believe that this factory will be able to deliver more than $1 billion in incremental yearly revenue. On the new product front, we are seeing a high level of customer interest in our new technology platforms and in our ability to quickly develop custom products based on those platforms. Now let me provide some color on each of our markets. In semiconductor, third quarter revenue was down sequentially, but about flat year-over-year. Despite some near-term market choppiness, we expect 2025 to be our second-best year ever in Semiconductor. Looking forward, we expect demand for both leading-edge logic and memory to accelerate in the second half of 2026, moving into 2027.

The leading edge is where our eVoS and eVerest technologies have taken root. So we expect to see both revenue growth and share gain as the market strengthens. Customers have validated the yield and throughput benefits of our eVoS and eVerest platforms and continue to incorporate them into next-generation equipment. At SEMICON West, we showcased multiple versions of our eVerest platform, each tailored to a customer-specific application. In addition to our success in plasma power, we are also winning in system power applications. Adapting our latest industrial power technologies to the needs of semiconductor equipment makers. Multiple wins have begun ramping to volume. In data center computing, revenue more than doubled year on year and reached another record. Our technology leadership, superior execution, and accelerated capital investment have enabled this increase in profitable revenue.

We expect AI-driven demand to remain robust in the coming quarters and to drive year-on-year growth in 2026. New program wins secured over the past year are beginning to go into production later this quarter, with further high-volume ramps beginning in the first quarter of 2026. In addition, we are deeply engaged with our customers in the development of next-generation power solutions, including more efficient high-voltage DC power architectures. We expect most of our current design engagements to ramp to volume in 2027, with more to come in 2028. At the recent OCP Global Summit, we unveiled several new high-power platforms geared to meet the next-generation needs of our customers. In fact, several of our partners featured our products on the show floor. In addition, we are seeing strong interest from emerging cloud and enterprise customers seeking proven, reliable, efficient, and compact solutions for their AI racks.

Leveraging in-house technology blocks, we believe that we can quickly customize solutions for many of these customers. In industrial medical, revenue and backlog again grew sequentially in the third quarter as customer inventories continued to normalize. In the distribution channel, resales grew sequentially, and inventories declined for the sixth consecutive quarter. Looking forward, we expect steady revenue improvement in the coming quarters. In Q3, we secured important design wins in aerospace and defense and in several medical applications. We are delighted with the customer enthusiasm for our new technology platforms, such as the high-power density Evergreen series and the NeoPower line of configurable power solutions. Acceptance of these and other new platforms will help to drive market share gains beginning next year. In addition, our opportunity funnel continues to grow, benefiting from our strong digital marketing efforts, robust distribution partnerships, and a focused sales and applications team.

In Telecom and Networking, revenue grew sequentially. We also expect sequential growth in the current quarter driven by AI-related programs. Now for a few closing thoughts. Due to our technology leadership, development speed, and operational execution, we now expect overall 2025 revenue to grow approximately 20%. Since our Analyst Day a year ago, infrastructure investments in artificial intelligence have increased substantially. These investments are driving increased demand for differentiated data center power solutions. In addition, high-performance AI systems are stimulating investments in leading-edge logic and memory processes, which in turn will drive demand for our latest plasma power technologies. In Semiconductor, we believe the customer acceptance of our eVoS and eVerest technologies is laying the foundation for meaningful share gain. In data center, we now expect revenue to more than double in 2025, with further growth in 2026. And in I&M,

We believe that our design win pipeline will drive market share gains in the coming quarters. Our manufacturing strategy and execution have enabled us to consolidate our factory footprint and meet growing demand. Looking forward, we are taking additional actions to further improve manufacturing efficiency, enable scale, and achieve our long-term gross margin goals. In addition, we now have our 500,000 sq ft Thailand factory available to ramp on short notice. Finally, with a strong balance sheet, we continue to pursue acquisitions which meet our strategic and financial goals. Paul will now provide more detailed financial information.

Thank you, Steve, and good afternoon, everyone. Third quarter revenue of $463 million was above the high end of our guidance as investments in operational capacity and flexibility enabled us to capture higher data center demand. Gross margin improved quarter-over-quarter and exceeded our target, driven by faster-than-expected benefits from our China factory closure and lower tariff costs. Operating margin improved 220 basis points sequentially, and we delivered earnings per share of $1.74, up 78% from last year and at the highest level since 2022. In addition, we more than doubled our operating and free cash flow over last year, even as we increased capital investments to meet growing data center demand. Now let's review our financial results in more detail. Third quarter total revenue was $463 million, up 5% sequentially and 24% year-over-year.

Revenue in the semiconductor market of $197 million was about flat year-over-year, but down 6% sequentially, consistent with near-term market dynamics. Data center computing revenue was $172 million, up 113% year-over-year and up 21% quarter-over-quarter. We executed well to respond to changes in customer demand, enabling us to capture higher revenue in a dynamic supply chain environment. Industrial medical revenue of $71 million was down 7% from last year but increased sequentially again, up 4% from last quarter. Encouraging data points from our distributors include six consecutive quarters of decreasing inventories and continued improvement in bookings, backlog, and sell-through. Telecom and Networking revenue was $24 million, up 24% from last year's low due to timing of some programs and up slightly quarter-over-quarter.

Gross margin was 39.1%, up 280 basis points over last year and 100 basis points sequentially, driven by earlier-than-expected benefits of our China factory closure, better factory loading, and lower near-term tariff costs. We are pleased that we again improved gross margin despite a higher mix of data center revenue and related factory ramp costs. Operating expenses were $103 million, flat from last quarter and slightly lower than expected due to the timing of SG&A spending. OpEx, as a percentage of our revenue, decreased 360 basis points year-over-year, demonstrating the leverage in our model. Operating income for the quarter was $78 million, with operating margins at 16.8% of sales, the highest level since 2022. Depreciation was $10 million, and our adjusted EBITDA was $87 million. Other income was down slightly at $1.7 million on higher FX costs.

For Q3, our non-GAAP tax rate was 16.6% on favorable mix of earnings and benefits of amortizing R&D in the U.S. under the new tax law. Third quarter EPS was $1.74 per share, compared to $1.50 in the previous quarter and $0.98 a year ago. Turning now to the balance sheet, total cash and cash equivalents at the end of the second quarter was $759 million, with net cash of $192 million. Cash increased by $45 million quarter-over-quarter. Cash flow from continuing operations was $79 million, and free cash flow was $51 million, up 124% year-over-year. Inventory turns increased slightly quarter over quarter at 2.8x on higher revenue. Receivables improved from 62 to 58 days, and DPO was about flat at 62 days. During the third quarter, we paid $4 million in dividends and invested $28 million in capital equipment.

We expect full year 2025 capital investments to be at the high end of our range of 5%-6% of sales and to remain elevated for the next few quarters on investments in data center capacity, infrastructure capability, and our factory consolidation strategy. Before moving on to guidance, let me provide some comments on the impact of tariffs. The environment continues to be dynamic, requiring us to implement additional actions to mitigate the impact of new tariffs. Although tariffs were lower in the third quarter on timing of recoveries, we expect tariffs to increase in the fourth quarter and continue to be in the 100 basis points range. Turning now to guidance, we expect Q4 total revenue to increase sequentially to approximately $470 million, ± $20 million. Semiconductor revenue is expected to be down slightly, consistent with customer forecasts.

We expect data center computing revenue to increase modestly from the strong Q3 levels based on mix and timing of customer shipments. In industrial and medical, we expect sequential revenue growth over the next few quarters, paced by uncertainty in the macro environment. And in telecom and networking, revenue is expected to be up slightly on demand for AI-related products. We expect gross margin in the fourth quarter to be between 39%-40%, with benefits of cost optimization partially offset by increased tariff costs. We continue to believe that, excluding the impact of tariffs, Q4 gross margins would be at 40% or greater. We expect operating expenses to increase to approximately $107 million, on R&D program-related costs and higher variable costs given the stronger full year performance. Other income should be $1.5 million-$2 million, and the tax rate is expected to be around 17%.

As a result, we expect Q4 non-GAAP earnings per share to be $1.75, ± $0.25. Now for some closing comments. Our solid performance this year confirms that AE's diversification strategy is working. By leveraging our broad portfolio of power technologies and our industry-leading engineering team, we are targeting to win in the semiconductor, data center computing, and industrial and medical markets. These three growth markets inherently come with different business cycles, mitigating industry risks while enabling more consistent revenue growth, profits, and cash flow. Driven by our success in capturing AI-related demand, we are raising our 2025 total revenue growth outlook from 17%-20%. With data center computing revenue growth increasing from up over 80% to now more than double 2024 levels.

Based on the midpoint of our Q4 guidance, we expect 2025 gross margin to expand 240 basis points and operating margins to improve by 530 basis points, highlighting the progress we've made in improving margins and driving operating leverage. Going into 2026, we are well positioned to deliver growth in each of our targeted markets. In semiconductor, we expect our new products and leading-edge investments to drive growth as the market accelerates in the second half. In data center computing, next-generation designs secured this year are targeted to ramp in early 2026. Resulting in projected growth of 25%-30%. I&M is expected to benefit from our design win pipeline and ongoing market recovery to continue to grow sequentially each quarter.

With plans for further manufacturing efficiencies, product portfolio improvement, and ongoing tariff mitigation efforts, we remain focused on delivering higher gross margins and believe that we will reach our initial goal of 40% in the near term, despite the impact of tariffs and higher data center mix. Finally, with a solid balance sheet and demonstrated cash flow generation through peaks and troughs, we will continue to look for strategic acquisitions to add scope and leverage our scale. With that, we'll take your questions, operator.