Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Q1 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference call, Annie Leschin, Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us today for our first quarter 2015 earnings conference call. With me on today’s call are Yuval Wasserman, President and CEO; and Bill Trupkiewicz, Controller and Chief Accounting Officer. By now you should have received a copy of the earnings release that was issued yesterday evening. For a copy of the release, please visit our website at advancedenergy.com or call us directly at 970-407-4670. Now, I’d like to remind everyone that except for the historical financial information contained herein, the matters discussed on this call contains 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, plans, objectives, estimates, anticipates, intends, targets, goals or the like should be viewed as forward-looking and uncertain. Such risks and uncertainties include, but are not limited to, the volatility and cyclicality of the industries 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 have provided you during this call, including our guidance provided today and in our press release. Guidance will not be updated after today’s call until our next scheduled quarterly financial release. I would now like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Annie, and good morning everyone and thank you for joining us for our first quarter conference call. As Annie mentioned, with us today is Bill Trupkiewicz, our Chief Accounting Officer, who will present our financial results for the quarter. As I’m sure many of you saw in our announcement on April 16, we recently hired Tom Liguori as our new CFO. With over 30 years in finance and operations, Tom is a strong leader with a great deal of strategic and operational management experience. He has been CFO at a number of public companies over the last 15 years and in his current role at Multi-Fineline Electronix he has built a strong global finance organization during a period of significant growth of the company. We are thrilled to have him join us on May 18 and look forward to introducing him to you over the next several months. As we continue to invest in our future growth we have strengthened our management team with new dedicated resources. First, we hired a VP of Business Development, who will be solely dedicated to managing our pipeline of opportunities and potential acquisitions. Given our leadership and growth aspirations in precision power solutions as well as the significant size of the target markets we’re pursuing, we believe this is an important addition to our team. Also this quarter, we broadened our regional footprint to include more industrial market by hiring a Country Manager in India to focus on our local strategic objectives and expand and develop our local infrastructure. Outside of our local inverter activities, India is evolving to be a meaningful market for Advanced Energy in a variety of additional areas in mainly in industrial applications. These hires enhance our leadership team and I believe will better enable us to execute…

Thank you, Yuval. In today’s call I will refer to both GAAP and non-GAAP results. As a reminder, non-GAAP measures exclude the impact of acquisition-related costs, stock-based compensation, amortization of intangibles, and other non-recurring items. A reconciliation of non-GAAP income from operations and per-share earnings is provided in the press release table. I’ll be referring to the slides posted on our website this morning. Now, turning to the first quarter results on Slide 11, total revenues in the first quarter were $141 million, a decrease of $11.6 million from the previous quarter and up slightly from the same period a year ago. We achieved our second consecutive record quarter in sales to our semiconductor applications which were partially offset by a seasonal winter decline in solar inverters and pricing pressures coupled with our ongoing pursuit of strategic alternatives and cyclicality of our industrial and flat panel display applications. Non-GAAP adjusted net income was $23.6 million, represented a 15% increase from the fourth quarter and a 30% increase versus the same quarter last year. We ended the quarter with a $156 million in cash and investments, the sequential increase of approximately $28 million over the previous quarter. Looking at a breakdown of our revenue performance on Slide 12, sales to semiconductor applications rose to a new quarterly record of $73.2 million, up approximately 4% sequentially, driven by our leadership position in etch applications. Service revenue was slightly lower at $12.2 million in the quarter, due to unfavorable foreign exchange rates. Sales to data storage and industrial applications decreased 5.5% to $16.1 million from $17 million last quarter, due to unfavorable exchange rates and a market slowdown in China. Flat panel display applications declined to $900,000 from $3.6 million, as the industry paused due to overcapacity in LCD tools. Renewable sales were…

[Operator Instructions] Our first question comes from Edwin Mok of Needham & Company.

Great. Thanks for taking my question and congrats for a great quarter. So first on the semi cap side, I think, Yuval, you mentioned particular wins in that area, which sounds really good. But if I look at your guidance - listen to your guidance to semi cap, you expect some moderation obviously after the first few quarter, a very strong quarter. But if I take the midpoint of your guidance, you’re down around $10 million sequentially and you said that the other pieces of business you expect to have some recovery. So that implies semi cap is down more than 10%, did I get that directionally correct, or if you can give some color on that?

So, Edwin, good morning. We usually don’t break down the guidance numbers. What I can give you in general, we expect a decline in semi in the second quarter, mainly driven by a end customer mix decisions about timing of investment in factories, in FABs and the demand that is projected to us by our customers. So we had really strong quarters and the last Q1 was a record quarter again driven by, again, as I said before, etch and pull ins from some of our Asian customers that requested their shipments earlier in - than Q2. In general, as I mentioned before, we’ll see a decline. I cannot exactly tell you the magnitude, but we expect a decline in Q2.

Okay. Then maybe I’ll bounce off and talk about the flat panel display. I was surprised how low the revenue was this last quarter, and you mentioned there was some digestion in the industry with regarding maybe a little overcapacity, right? So I was wondering do you have any kind of view in terms of how long that could last or should we expect this kind of the slow level to continue into the second quarter and beyond?

So one comment, our presence in the flat panel display business, we have a very strong presence in the touch panel part of the business and this touch panel business drove a significant growth for us in Q4. And what we saw is overcapacity in this specific area of the market. We expect to see recovery in the flat panel display market in the second quarter. If you look at our projection for Q2, we anticipate semi and glass to decline and all of the other industrial components and applications to increase in Q2.

Great. That’s helpful. Third question I have is you mentioned there is - with your plan to diversify in the industry, you mentioned that there is some change in the go-to-market strategy and you are going to work more with local partners, right? I’m also wondering how does that - is that process that you guys have already started? Where are you in that kind of for a newer go-to-market strategy for industrial space? And then in terms of cost structure-wise, how does that affect, either benefit or impact you in costs or margins?

Sure. Thanks for the question, Edwin. As we - as I think we covered that briefly during the Analyst Day. As we branch into new markets and applications, especially the industrial, general industrial non-thin film applications, high voltage applications, and the power control modules applications, we entered into a world where we have hundreds of products and thousands of customers, right? So in order to effectively approach the market, we migrated into more of a hybrid sales structure. We continue to serve our traditional customers with major key account teams that are very dedicated to operate intimately with those accounts. Example could be the major semiconductor equipment companies. However, as we branch out geographically into the industrial world, we started to operate in two additional models. One is strategic partners, channel partners. One of them, for example, is Rockwell Automation. Rockwell Automation, if you go to the Rockwell Automation website, you will find our PCM products on their website. So now we are partnering, and this is one example, with giant industrial automation companies around the world to pull our products through their systems and channels. Thirdly, as we go into the general industrial applications, for example, high voltage, we use existing channels and reps, distribution networks that we inherited through the acquisition and new distribution channel as we sign up after the acquisitions. These are - all of these are practically flexible costs, they do not increase our fixed costs. And put more feet on the ground, accelerate our penetration to world markets, increase our footprint and are very effective in terms of the cost of sales.

Great. Helpful. And then last question, and I’ll go away. So any kind of update you can provide on the strategy for the solar piece? And then I also noticed that, while you’re operating margins remain pretty low for the quarter, if I back out kind of a fixed offering expense that imply your gross margin for your solar business actually improved this quarter. What drove the improvement in the gross margin?

Okay. So let me answer the second question first. This quarter we saw an improvement in our inverter gross margin driven as a result for a significant increase in our service revenue, and this service revenue based on a large contract we had with a large customer came with significant higher margins compared to the product margins. Your previous question is a status of our project. We continue, as I mentioned earlier, we’re continuing the process of finalizing the evaluation of strategic options. As we continue to do that, we continue to manage and run the business. We continue to stand behind the products. We continue to support our customers. We continue to book orders and generate backlog. We continue to deliver on the products, and we continue to reduce the costs. Long-term, as we mentioned to you all during the Analyst Day, long-term the performance of this business is not in line with our strategic objectives and is not in line with our model and long term, as we presented to you, we see that business that we will depart from. But as long as we continue to have this business and own it, we continue to run it the best we can, to drive revenue and to drive profit.

Great. That’s all I have. Thank you.

Thanks.

Our next question comes from Krish Sankar with Bank of America Merrill Lynch.

Yes. Hi, thanks for taking my question. I have a couple of them. First of all, Yuval mentioned the reuse of the equipment being kin of a head wind. I’m kind of curious if you end up reusing the actual equipment, if I’m using a system for FinFET node or whatever it is, I will still need to upgrade the power supply, right? Is that a fair enough characterization or is it being too optimistic?

It’s really - it’s a great question, it depends. It depends on the actual process that is being implemented. Some of the processing equipment can be used as is and as we heard from large companies out there, people expect to see 80% to 90% capital reuse. The question is if they adopt new materials for, let’s say, thin film deposition, ALD or PE-CVD, they may require a change in the power delivery system. Similarly, depends on the etch process, if they go from standard etch to a more - much more sophisticated 3D type etch process, they may go to a different power supply delivery system. From my perspective, I think the driver for some of the recent design wins that we had, especially with our 2 megahertz power supplies, the pulse RX systems would be driven more by the transition into 3D etch applications in mass production than conversion of tools - existing tools to new power supplies.

That’s really helpful. And is there any way you can quantify going from like going into the FinFET node for you from a power product standpoint, how much increase in sort of available market it is?

I’m sorry, I couldn’t hear you. Can you repeat the question, Krish?

Can you quantify the move into the FinFET node, how much does it increase sort of available market, either overall for Advanced Energy power products or if you can say specifically for etch or that…?

It’s very difficult for me to predict that. I think if you look at some of our customers’ publications, there is some indication about what the migration to 3D devices, FinFET and 3D-NAND can impact, especially the position in etch applications. What I can tell you though that 18 months ago we started shipping our first 2 megahertz units to the market. These power supplies are specifically geared for those advanced applications, and what we see is a continuing increase in our shipments, and we are right now entering into more of a ramp situation as our products are entering into early stage production. We expect this specific application space to drive growth for us.

Gotcha. Just a final question $156 million in cash on the balance sheet, what is the minimum cash you need to run just the Precision Power Products business alone?

I think during the analyst day, I think we answered this question and the answer to the question was broadly at about $70 million.

Got it. Thank you very much.

This is something that we - I think that was a question we answered during the analyst day.

Yes. Thank you.

Our next question comes from Jim Covello with Goldman Sachs.

Thanks so much. I appreciate you taking the question. I would love to drill down just a little bit more on the semi cap piece. Obviously different of your customers in that area have said different things, and one of the things I’m wondering about is if you’re seeing any difference in your business going direct to the semi customers versus selling into the semi equipment customers? Are you seeing any kind of differences in the dynamics of your business between those two customers?

If I understand your question correctly, most of our revenue comes from selling directly to the OEMs, the vast majority of the business. There is obviously - I think what - in term of dynamic, there is more influence, I think, if - by the end users on the market in general. The industry consolidates, we have now four or five companies building FABs, buying equipment, processing equipment maybe three or four companies that buy power supplies from two to three companies. So it’s a very, very concentrated market right now, and that may change the dynamic as through the value chain there is more cautious about - more caution about IP, more caution about the time to market, the acceleration of technology transition from node to node effects everybody, and it requires a little bit of new engagement model between our customers and their customers and our customers and us.

Okay. That’s helpful. And then as a follow-up, I mean, I guess it’s sort of related to the same topic. A couple of the semi equipment OEMs had very good things to say. A couple of the other ones had a little bit more cautious things to say. I guess my faulty expectation was that you had a little bit more exposure to some of the customers that had some good things to say and some of the reuse issues were relegated to areas where you didn’t have as much exposure, but is that not the case?

Well, I - obviously our presence at various OEM is different and non-uniform and not only in terms of our content, but also in terms of which applications our products are being used for. Obviously a lot of the good news for us came from our penetration to the advanced applications. But at the same time we are a supplier to some of the second tier equipment suppliers that go into more of the less advanced applications like DRAM, and in that area, as you know, there is some changes due to the timing of investment in Korea, for example. So I think it’s a mixed picture, it’s not one zero.

Okay. Very helpful. Thank you and good luck.

Thanks.

Next question comes from Joe Maxa with Dougherty & Company.

You mentioned solar is likely not in your long term plans. I’m just wondering what the thought is. You talked about filing - finishing up your strategic alternative process in Q2. Is there something that may be a short-term alternative before you part with this thing longer term?

As I mentioned before, we continue to run the business, we continue to book orders, generate backlog, serve our customers. Our inverters, especially in the utility scale, we have customers that designed our unique bi-polar technology into the future projects. We support them, we continue to deliver products to them, support the product. Our highly performing, the 1000NX product is a key feature in some of the utility scales project, and we continue to book orders and support them. We do that while at the same time continue to evaluate our strategic options, and as we said, we expect to conclude our process in Q2, and you will - you all are going to hear from us what the conclusion of that analysis is and what we plant to do.

Okay, okay. And also can you give us a sense, maybe a range of what we should - let’s say solar did go away at some point. What should we be looking at as far as a range of gross margin for the rest of your business?

So I think - I would send you back to the presentation we made during the analyst day and to really use data what we did we presented 2014 with and without the inverter business. And I think, it’s a very helpful analysis that you can refer to because it shows you really in real numbers what impact of the inverter business on the total business. And that will show you what will be the impact on - on profitability, what will be the costs that will be stranded behind when the inverter business goes away, et cetera.

Thank you.

[Operator Instructions] Our next question comes from Pavel Molchanov with Raymond James.

Hi. Thanks for taking the question. You referenced in your comments about solar that the ongoing process has had an effect on sales in the quarter. Is that basically a - kind of a nice way of saying that some customers are leery of buying from you guys just because the segment may not be around much longer?

Yes. Let me be more specific. Our large customers, what we call them T1 customers, continue to place orders, continue to take our products, continue to install our products, for example, the recent announcement we made about winning 325-megawatt portfolio project. Some of the smaller, more privately held, small project developers, especially in the U.S., are more concerned about the - what will be the outcome of our strategic evaluation process, and some of them are just pausing, delaying some investments or some of them decided to go with somebody else. But in general, yes.

Okay. Understood. And again, without sort of prejudicing how the process will conclude, as you started looking at strategic alternatives in December versus today, have you found more third party interest in either buying or doing something else, or has it been kind of more subdued versus your initial expectations?

Pavel, I’m sorry. I honestly cannot - I cannot respond to the question, I’m sorry.

Okay. Let me try to frame it this way. The mark - overall industry conditions, bearing in mind, you know, the Chinese tariff and, price pressure, et cetera, has - is that about what you would have expected in December for now, May 2015 or do you think it’s deteriorated further? Just talking about the industry broadly.

The industry broadly, I believe, becoming - as I mentioned in my prepared remarks, I think in general the industry is becoming more challenging, especially in Europe, Germany. Interestingly enough - we see from our perspective one of the Asian regions is better than we thought. At the same time, I would say that in general we saw more price pressures, more fierce competition and more nervousness in the - in Europe. What I would say but at the same time, we see a little bit of acceleration of the investment in utility scale projects, and I believe and it’s my opinion could be an anticipation of a 2017 change in the ITC.

Okay. I’ll leave it there. I appreciate it.

Thanks.

Our next question comes from Jairam Nathan with Sidoti.

My question was regarding gross margins. If I kind of look at your guidance for the second quarter and compare it to last year, your revenues are down on EPS pretty much flat to slightly up, so should we assume some of the gross margin strength that you saw in first quarter continues?

Bill, do you want to answer that?

Yes. I think we are confident in a mix shift that will support the forecast that we provided. There’s going to be puts and takes, obviously, as there are every quarter, but we’re confident in our estimate.

Okay. So do you - okay. So the - specifically the benefit on the solar side from the service contract, that’s not one time, is that kind of ongoing?

That was a one-time. What Bill is referring to is as we look into Q2, we expect our product mix to change, and this is very typical in the industries we serve. Some of the industries we serve are lumpy, as I explained earlier regarding the flat panel display business, we had a very strong quarter followed by a weak quarter, and we expect to see an increase next quarter. So it’s all about the mix of products. If you look at Q1, the reason Q1 was better than what we guided for is a result of change in product mix, and this change in product mix and the addition of the unique service contract we had, shifted the total company gross margins, and this is - this is part of the industries we serve. Even when we look at the semiconductor industry, there is a certain level of uncertainty about forecasting driven by the decision of the factory, the end user to accelerate, to delay investment in DRAM or flash memory or logic. These changes vary rapidly going through the value chain and affect us. Our ability to be agile and to respond very quickly to demand changes and mix changes is what allowed us to be able to fulfill the demand and the changes within Q1. So the assumptions we made about Q2 are based on our assumed product mix and demand profile that we see - that we saw right now, we put together the plan for Q2. Obviously things may change, as I explained over the dynamic in the market. As Bill said, with this demand profile and with this product mix that we know we have right now, we’re very confident with the numbers.

Okay. And my second question was on you mentioned some - ForEx was a head wind for the industry. Is that mostly like translation, or are you seeing some pressure on the kind of pricing side?

It’s mainly translation. Let me be more specific. As you know we acquired - we acquired companies in the Euro zone, and one of the companies we acquired in the Euro zone manufactures in Europe and sells in Europe, mostly. As we expand this business beyond the European regime, when we take this business and translate the revenue from euros to dollars, there is a translation impact on the top line. That’s exactly what we saw in this specific area. The good thing is as we continue to consolidate that acquired entity, we migrate our production to low cost zone outside of the Euro zone and expanding the revenue globally outside of the Euro zone, so we expect to be more diversified and less susceptible.

Okay. Thank you. Thanks, that’s all.

I’m not showing any further questions. I’d like to turn the conference back over to our host.

Thank you all for joining us today. We look forward to seeing you in the upcoming quarter or on our next conference call, and we look forward to updating you on our further inverter plans, and we will talk to you all soon.

Thank you very much. Bye-bye.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.