ADVANCED ENERGY INDUSTRIES INC Q1 2026 earnings call

Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy first quarter 2026 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 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 estimates as of today, May 4, 2026, 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.

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. First quarter revenue came in above the midpoint of guidance, driven by record data center revenue. Total revenue increased 26% year-on-year, and gross margin exceeded 40%. In the second quarter, we expect to deliver record revenue, largely due to strength in semiconductor. Looking into the second half of 2026, we see increased demand in all of our markets. We are particularly well-positioned to benefit from AI-related capacity investments in data centers and wafer fabs. We are also seeing steady improvement in the industrial medical market, as evidenced by a 14% sequential increase in bookings and a growing backlog. We delivered over 40% gross margin in the first quarter, the culmination of a multi-year effort to improve our manufacturing efficiency and product differentiation.

Our investments in leadership technology and world-class manufacturing are paying off. Looking forward, we believe that we can further increase gross margin as high-value products ramp to volume and manufacturing efficiency continues to improve. Given our progress over the last few years, we are confident that we can achieve the longer-term goal of greater than 43% gross margin. Given the strong demand environment, we are executing our capacity expansion plans in Malaysia, the Philippines, and Mexico. Moving forward, we will focus on building out capacity at our new 500,000 sq ft facility in Thailand. Qualification builds for semiconductor and data center products are kicking off this quarter, with initial production slated for late 2026 or early 2027. Exiting the year, we expect to have over $2.5 billion in revenue-generating capacity.

The addition of Thailand will bring total capacity to over $3.5 billion once it is fully built out. Let me provide some color on each of our markets. Semiconductor revenue increased quarter-over-quarter and was flattish year-on-year. In the first quarter, customer forecast strengthened considerably, which we believe will drive record performance in 2026 and continued growth in 2027. We are delighted by the widespread customer acceptance of our eVoS, eVerest, and NavX plasma power technologies. These technologies enable significant improvements in throughput and yield at the leading edge and are expected to drive market share gains into the next decade. We are seeing wider adoption of these technologies across multiple generations of processes and device types.

We are also benefiting from an uptick in demand for our system power products, largely due to recent wins and test in wafer fab equipment applications. In data center computing, we delivered record revenue in the first quarter. Overall demand in the data center market remains very strong. Based on customer forecasts, we expect second half revenue to be stronger than first half. We continue to make solid progress developing next generation technology, including 800-V solutions. We are working closely with multiple customers who view AE as a technology leader in this space. The attributes which have fueled our success in the data center market, power density, efficiency, reliability, and development speed will be equally critical to our success in next-generation platforms. In the first quarter, leveraging our technology expertise and product portfolio, we secured multiple new wins with second wave data center customers.

Factory qualifications should be completed this year ahead of production ramps in 2027. Industrial medical revenue was up year-on-year, but down sequentially. Although demand is improving, factory priorities in the first quarter limited our output. We expect to increase our factory output in the short term, which should enable INM revenue to track bookings moving forward. In medical, we secured multiple wins in therapeutic, diagnostic, and life science applications. In industrial, we won key designs in test and measurement, factory automation, and battery backup applications. We secured many of these wins by adding custom features to best-in-class technology platforms, enabling us to meet customers' unique requirements. We have won a number of opportunities with new customers, many of whom discovered AE products on our website.

Some of these wins have been quite large, reinforcing our view that the new website is acting as a force multiplier in the INM space. Telecom and networking revenue grew to its highest level since 2023, driven by the production ramp of several AI-related wins in the networking space. I'd like to provide an update to our 2026 view. Based on strengthening demand and new product momentum, we are now expecting year-over-year revenue growth in the low to mid 20% range. This outlook represents the second consecutive year of greater than 20% growth for Advanced Energy. In semiconductor, we expect demand to start accelerating in the second quarter, supporting a stronger outlook for 2026. With some of our new products moving into high-volume production later this year, we believe that we are well-positioned to drive further growth in 2027 and beyond.

In data center, based on strong customer adoption of our high-power AI solutions, we are raising our full-year revenue growth expectation to the mid 30% range. In the industrial medical market, we expect sequential revenue growth over the next few quarters, supported by improved market conditions and the production ramps of several key design wins. For some closing thoughts. First, demand across all of our markets is strong, and we are raising our growth target for the year. While supply and cost challenges have begun to surface, we are well prepared to navigate a dynamic environment. Second, we continue to see strong pull for our new products across all target markets. Our design win pipeline is growing and is expected to drive higher revenue and profits in the coming years.

Third, we're proud to have achieved 40% gross margin in the first quarter, but we are not done. We have line of sight to 43% based on the success of our new products and efficiency gains. Finally, we have a solid pipeline of potential acquisitions and will continue to actively pursue opportunities which make strategic and financial sense. Paul will now provide more detailed financial information.

Thank you, Steve. Good afternoon, everyone. Overall, we executed well in the first quarter. Revenue of $511 million increased 26% year-over-year and was ahead of our guidance, driven by strong data center computing revenue. Importantly, we achieved our initial milestone of gross margins of over 40% despite ongoing tariff expenses and less favorable market mix than we originally modeled. It is the highest level since the Artesyn acquisition in 2019, highlighting the structural improvements we've made in operational efficiency and our product portfolio. With solid operating leverage, we delivered record operating income of $98 million. As a result, first quarter earnings per share were $2.09, exceeding our guidance and up 70% year-over-year. Now let's review our first quarter financial results in more detail.

First quarter semiconductor revenue of $219 million grew 4% sequentially, finishing just below our mid-cycle peak last year. Looking forward, our outlook is increasing based on stronger customer demand. Data center computing revenue was another record at $194 million, up 9% sequentially and 102% year-over-year. While demand remains high, we continue to experience frequent customer changes in demand mix due to various downstream constraints. While we expect this demand volatility to limit revenue in Q2, we anticipate the ramp of several programs to support a stronger second half. Industrial and medical market revenue was $72 million, down 8% from last quarter, but up 12% from last year.

We prioritized factory production to meet demand in other markets, impacting revenue for the quarter. On the other hand, demand is strengthening as bookings grew 14% sequentially, reaching the highest level since 2023. Distributor sell-through increased again and inventory levels further normalized. Telecom and networking revenue increased 17% sequentially and 16% year-over-year to $25 million. Ahead of expectations due to strength in AI-related networking programs. First quarter gross margin was 40.1%, up 40 basis points from last quarter and 220 basis points from last year. Gross margin was above our previous guidance, driven by better product mix and lower other cost of sales. Looking ahead, we expect to further expand gross margins on ramp-up of higher margin new products, improved manufacturing efficiency, and higher volume.

Operating expenses of $107 million were down slightly from last quarter and at the low end of our target range. OpEx increased 9% year-over-year, well below half of our revenue growth rate of 26%. As a result, first quarter operating income reached $98 million, and operating margin was 19.1%, up 560 basis points from last year. Depreciation was $10.5 million, and our adjusted EBITDA was $108 million, up 66% year-over-year and also a record. Other income was roughly break even versus $1 million in Q4, mainly due to higher realized FX losses. For Q1, our non-GAAP tax rate was 14.5%, below our target mainly due to timing of discrete tax items.

First quarter earnings were $2.09 per share compared to $1.94 in the previous quarter and $1.23 a year ago. Turning now to the balance sheet. Total cash and cash equivalents at the end of the first quarter was $700 million with net cash of $131 million. During the quarter, we increased inventory by $48 million, mostly in critical piece parts to support growth and improve supply resiliency. As a result, inventory days increased 10 days to 135, with turns of about 2.7x. Correspondingly, DPO increased from 68 days in Q4 to 80 in Q1. DSO increased six days to 66 days in Q1 on higher revenue.

As a result of the increased trade net working capital to support growth and to seasonal factors such as timing of incentive and tax payments, cash flow from continuing operations was an outflow of $6 million. During the first quarter, we spent $37 million in CapEx as we continue to invest in capacity and capability across our factory network. We paid $3.8 million in dividends, and we repurchased $300,000 of common stock at an average price of $209.36 per share. Turning now to our guidance. We are forecasting our second quarter revenue to be approximately $540 million, ±$20 million. We expect the majority of the sequential growth to come from the semiconductor and industrial and medical markets, while data center will moderate sequentially based on timing of customer deliveries.

We expect Q2 gross margin to improve 20 basis points-50 basis points sequentially, driven by higher volumes and more favorable mix. We expect Q2 operating expenses to increase to $112 million-$114 million, due primarily to investments in new products and annual merit increases. We expect other income to be approximately $1 million and the tax rate to remain within the 16%-17% range. As a result, we expect Q2 non-GAAP earnings per share to be $2.18, ±$0.25, on 40.6 million shares outstanding. For the full year 2026, we are raising our revenue growth target from the high teens to the low-to-mid 20s. The increased growth outlook contemplates solid customer demand, as well as some tightening in supply and increasing input costs.

In Semiconductor, we expect revenue to accelerate in the second half, with 2H revenues likely up over 30% from the prior year. In Data Center, despite a moderating Q2, we expect sequential growth in the second half and are raising our full year revenue growth outlook from over 30% to the mid-30s. In Industrial and Medical, we expect revenue growth throughout the year on higher demand and increased factory output. With continued improvement in gross margin and operating leverage in our model, we expect earnings to grow meaningfully faster than revenue for the year. Finally, we expect our 2026 CapEx will be in the $170 million-$180 million range, up slightly from our previous outlook based on initial investments in the Thailand factory to support earlier customer qualifications.

Despite higher capital spending, we are targeting 2026 free cash flow to be at or above 2025 levels. Before opening it up for questions, I want to highlight a few points. Demand is strengthening across our markets. Our diversification strategy is paying dividends as we are benefiting from accelerating growth in semiconductor, increasing investments in data center and AI infrastructure, and a recovering industrial and medical market. In addition to positive market trends, we expect our design win pipeline to contribute incremental revenue in 2026 and to support more meaningful growth in 2027 and beyond. We're excited to have achieved gross margin of over 40% this quarter and expect to further improve our margins for the full year. Longer term, with higher value new products, ongoing improvements in factory efficiency, and higher volumes, we remain confident in our ability to achieve our long-term goal of over 43%.

Finally, our balance sheet remains strong, enabling us to invest in capability and capacity to capture growth ahead while providing ample liquidity to pursue strategic acquisitions that create shareholder value. With that, we'll now take your questions. Operator?