Advanced Energy Industries, Inc. (AEIS) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Advanced Energy Industries Second Quarter 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] As a reminder, this conference is being recorded. I would now turn the call over to your host Annie Leschin, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today for our second quarter 2015 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 evening. For a copy of this release, please visit our website at advancedenergy.com or call us directly at 970-407-4670. Let me just mention that we will be presenting at the Jaffray’s Annual Industrial Conference on August 10th in New York City and at the Credit Suisse Small and Mid-Cap Conference on September of 13th also in New York City. As other events occur, we will make additional announcements. 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, estimate, anticipate, intent, target, goals or the like should be viewed forward-looking and uncertain. Such risks and uncertainties include, but 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 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. And just as a reminder in today’s call, we will refer to both GAAP and non-GAAP results. Non-GAAP measures exclude the impact of stock-based compensation, the amortization of intangibles, restructuring charges and other non-recurring items. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table. We’ll be referring to the earnings slide posted on our website as well as this morning. And with that, I’d like to turn the call over to Yuval Wasserman.

Thank you, Annie. Good morning everyone and thank you for joining us for our second quarter conference call. The second quarter of 2015 demonstrated the strength of AEIS business model. Results reached the high-end of our expectations and once again precision power products grew significant non-GAAP profitability in cash generation. Looking at the overall mix of revenue semiconductors trended with the served market slightly lower than recent record levels, while continuing to contribute significantly to total revenue and profitability. Record high service revenue and a sequential increase in our other precision for application, which going forward, we will be categorizing as industrial power all add in as well. As expect, without decision to pursue strategic alternative for the inverter business, inverter revenue declined this quarter. In total revenues for the quarter were $137 million and non-GAAP earnings per share were $0.43. This outperformance grew strong margins in $28 million of cash generation in the quarter. We ended the quarter with a healthy cash position of $183 million. Key to achieving our strategic plan is growing our presence in precision power applications in both our core applications and new verticals as we aim at increasing our total available market. We look at achieving these goals by continuously winning new applications. In the second quarter, we again added to our track record of winning at significant designs with our customers. Important wins in semiconductor applications included the growing etch in memory areas, specifically DRAM and NAND applications. We achieved these wins with our latest RF platforms including our advanced RF pulsing solutions, which clearly position us in the market for advanced application. The increase in power content used an advanced plasma processing wafer FAB equipment should drive additional acceleration. One of our mandates in Solvix hard coating product line has been to expand a distribution of these products, both geographically and vertically. Historically this business was based almost exclusively in Europe. This quarter we were awarded some important view design wins in North America and Korea, which expanded our served available market. With a interaction of U.S. specific sold these products we’re now penetrating and gaining traction in U.S. hard coating space. Another important area in our strategy where we are winning new designs is large area spluttering. Our new bipolar DC and pulse DC technologies are enabling our customers to provide better control, improved film properties and productivity in applications such as architectural glass, flat panel display and solar cells manufacturing. Since the release in recent quarters these new products have seen quick market adoption displacing competitive offers. In high voltage, we won a number of designs and secured order for applications that we are targeting for the last six to nine months in areas including mass spectrometry, industrial x-ray, analytical instruments, lasers, and defense. This progress could translate into some sizeable incremental revenue in the future for our high voltage business. Now let me turn to our quarterly results. The quarter's strong performance was again a testament to our product mix. Similar to most semiconductor capital equipment suppliers we had a better than expected quarter as demand remained beyond record levels industry wide. While the sales for semiconductor application's been slightly off of the recent highs, their predicted digestion heading into the quarter did not materialize due to lack of visibility into end users' capital spending plans. Revenues remain very strong and over $17 million, down just 4% sequentially and in line with our served markets. We continue to benefit from pushout of EUV which has created a significant opportunity for AE in serving the multi-patterning application base in etch and deposition. This contributed to the late quarter of polling as OEMs raised to meet strong demand in etch and PECVD. By and large we believe this trend should continue into the third quarter as utilization rates decline and the investment cycle transitions from DRAM to the ramp new 3D NAND and 60 nanometers and 40 nanometers film set foundry capacity increases. Also this quarter AE was named The Top Process Power Provider in one of the world's best subsystems suppliers by VLSI Research 2015 Customer Satisfaction Survey. This recognition by our customers reaffirms the high performance, reliability and success of our products, operational excellence and our customer engagement model. We continue to be a supplier of choice for key semiconductor customers, able to adapt to their advanced technology needs and meet their demands. In our industrial precision power applications, revenues were up slightly. Increases in process power for flat panel displays along with large glass coater award were moderated by a slight decline in other industrial application. While historically, a large portion of our industrial revenues came from industrial revenue is came from the EMEA, this quarter was where important wins tied to North America and Korean market where we are gaining more traction. Additionally, during our Analyst Day we’re laid out our go-to-market strategy to move into industrial markets through our hybrid sales approach. This quarter, we saw the results of our collaboration, but large industrial partners as we extent our global reach by offering AE power products through their worldwide channels. Already we have seen our first sizeable orders as a result of these engagements. Our service revenue this quarter was driven by share gains and volume increases in precision power services and a sizable inverter upgrade project award. Semi-fab utilization rates remained a primary driver of our service revenue, but we are also seeing more activity related to capital reuse and repurposing, upgrades and retrofits to newer generation products or what we described as value added sales. Share gains are being driven by both leading technology for newer generation products and lagging technology such as 200 millimeter wafers, MEMS and sensors, is the Internet of Things is becoming more pervasive. From a geographic perspective, we saw share gain in Precision Power Service ranging from the U.S. to Korea and Japan. As you know in late June, after a thorough strategic evaluation process, we announced our plans to wind down of our inverter business. We spend 6 months looking at a variety of strategic option including a potential sale, joint venture, partnership, spin-off, and licensing opportunities. In the end, we simply did not find and option that provided sufficient value in terms that were in the best interest of our shareholders and the company. Therefore, we made the decision to wind down the business through an orderly process allowing us to continue to fulfill orders through our existing inventory of products and to book orders so that we can convert raw materials on hand into finish goods for sale. I’m pleased to report that the wind down process has proceeded well in the first month. We remain on track to largely complete this process by year-end and we’ll update you as things progress. With this decision behind us, we’re now beginning to turn our full attention to our Precision Power business which we believe hold the great opportunity for AE in its advanced products. Our focus will remain on driving efficiency, while expanding our served application through both organic and inorganic means. In summary, half way through 2015 the semiconductor market has been a major driving force behind our strong financial performance on the top and bottom-lines and we expect that to continue in the third quarter as well. Our profitable business model and our powerful financial engine are positioning AE to stand out from its peers. Our recognized leadership in power conversion products along with our high rate of design wins across our markets is speaking volume to existing and potential customers. Entering the third quarter we believe it will be another third quarter for the semiconductor market. With the exception of inverters, most of our precision power applications should improve in the third quarter, leading to roughly flat revenue quarter-on-quarter. Finally, as the year progress we expect inverter revenues to continue to decline as we sale off our inventory and to wind down the business while continuing to lower our operating expenses. Our commitment to executing on our long-term plan to drive profitable growth, strong cash flow and EPS essential to our strategy of focusing solely on our precision power business. I would 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 would now like to turn the call over to Tom.

Thank you, Yuval. Looking at the second quarter financial highlights on slide 12. Total revenues exceeded our expectations for the quarter at $136.8 million driven by higher precision power sales. Non-GAAP earnings per share of $0.43 also came in above the expectations due to the performance of our precision power products. Cash increased to $183 million or $4.47 per share. The inverter wind down is proceeding well, both on schedule and budget. And to assist investors and analysts in understanding our financial results with and without the inverter business, we have provided additional non-GAAP information on revenues and operating income. Going forward we will be using the term the inverter business and results for the business excluding inverter. Turning to slide 13, which illustrates sales by market. Excluding inverters, revenues increased 28% year-over-year to $104.6 million. Semiconductor sales of $70.2 million drove the overall year-over-year increase, but were down slightly from the first quarter consistent with our - market. Industrial sales were up 6% year-over-year and up from the first quarter. Service revenues increase 13% year-over-year with all the share gains and volume increases. Inverter revenues decreased 50% year-over-year to $32.2 million as we continue to wind down the business. Turning to slide 14, and the additional non-GAAP information provided this quarter. Revenues excluding inverters increased 28% year-over-year to $104.6 million as I previously mentioned. Operating income excluding the inverter business was 28.6 million were 27% of revenues. This represents a 58% increase from 18.1 million in the second quarter of 2014, largely due to the higher volume and associated manufacturing economies. In the inverter business revenues decreased 50% year-over-year to 32.2 million as we continue to wind down the business. Restructuring charges for the wind down resulted in an inverter operating loss of 213.2 million in the quarter. It's important to note that we have previously referred 8 to 10 million of shared corporate overhead cost. For segment reporting, historically these costs were allocated between the two business units. Starting in the second quarter 100% of these overhead costs were included in business results excluding inverters. And no overhead costs were allocated to the inverter business. We anticipated that by mid-year 2016, about half of these overhead costs of 4 to 5 million will have been reduced. Turning to slide 15. The consolidated income statement. Many line items of the income statement were impacted by charges associated with the inverter wind down. These charges totaled 201 million and are included in three separate P&L line items. Turning to slide 16. Cost of sales included 15 million to write-down inventory; selling general and administrative expenses include 17.7 million; for receivables reserves and restructuring charges of 168.4 million include 154.6 million for impairment of goodwill and intangibles; 12.3 million for the write-down of fixed assets and 1.5 million for contract settlement cost. In addition the income tax line includes a non-cash tax accrual of 48 million. This charge is largely arithmetic resulting from the application of an annual tax rate to a quarterly loss that was heavily influenced by restructuring charge. For the full year 2015, we anticipate our total annual tax expense will be between zero and the tax benefit of 2 million. Therefore this charge should reverse. We expect the third and fourth quarters to have a tax benefit of between 50 million and 52 million. Looking beyond 2015, we anticipate our normalized tax rate for the business excluding inverters will be in the neighborhood of 15%. This tax accrual and other charges contributed to the large GAAP loss per share of $5.58 in the quarter, whereas non-GAAP EPS was $0.43. Turning to slide 17, the balance sheet. Cash increased by 27.3 million to 183.2 million. The increased was due to the performance of the business excluding inverters as well as 4.6 million tax refund. During the first half of the year, we increased our cash balance by 54.8 million. Decreases and receivables and the inventory were largely the results of the restructuring write-down for inverters. Working capital for Precision Power products decreased over 10 million due to reductions in inventory and receivables. Overall, our solid second quarter results reflected our ongoing commitment to growing and expanding our business through our Precision Power products. As we wind down our inverter business, we are reducing operating expenses, fulfilling orders and selling inventory. Despite the restructuring charges and one-time tax item in the quarter, our financial model continues to generate profit and significant cash. Turning to our guidance for the third quarter 2015, on slide 18. While we will providing total company guidance this quarter, in order to give investors more insight into the business, we will also be provided guidance with and without inverters. For the business excluding inverters, we expect third quarter revenues to be between 102 million and 110 million and non-GAAP operating income to be between 25 million and 30 million. For the inverter business, we expect third quarter revenues to be between 24 million and 27 million and non-GAAP operating loss of between 5 million and 8 million. For the total consolidated company, guidance is as follows. Revenues of 126 million to 137 million, GAAP EPS of $0.12 to $0.17, non-GAAP EPS of $0.45 to $0.50. I said previously, we expect our total 2015 tax expense to be between 0 and a tax benefit of 2 million. The GAAP and non-GAAP EPS guidance assumes a tax benefit of approximately 26 million in third quarter. This concludes our prepared remarks for today. Operator, I’d like to open the call for questions.

[Operator Instructions] Our first question comes from Edwin Mok with Needham & Company. Your line is open.

Great, thanks for taking my question and congrats for a good quarter. Actually the first question just housekeeping. Do you expect to see more restructuring charge or other restructuring related expenses on a third or fourth quarter?

Yes, we do. And that’s a good question Edwin. In the third quarter, our guidance reflects about $40 million of restructuring costs. So it has 40 million of restructuring and 26 million favorable tax benefit, and that's how you'd get to the EPS numbers of total company.

Okay. Great. Thanks for the background there. And then I guess question for you Yuval regarding the semi business. Actually it came in better than you had expected, you expected some digestion and you kind of little -- can you give us some color, and can you talk about maybe potential growth in the third quarter. Is there a way you can kind of give us some color in terms of how is environment like in the industry that you're seeing that allows you to be a little bit more upheat, and then how much of that better than expected results came from share gains that you guys had in the last quarter?

Okay. Hi, Edwin, Q2 the semi performance was better than we expect and was mainly because of last minute drop-in orders that came from decisions by end user to invest in specific fab areas. Our ability to respond very quickly to demand changes and mix changes allowed us to do better than we thought in Q2. Our opinion about Q3 or our guidance regarding Q3 is influenced by backlog of orders we have. As you know the visibility right now in the semiconductor market is not great. We have a lot of uncertainty relative to timing of investments. I see product mix, and products equipment mix in the market. Obviously with this very short-term visibility in the market, we need to be able to respond quickly, not only to demand changes but also mix change and also mix change between our OEMs. And that's basically what we see right now. If you look at the total view of the year we still have some merchandise relative to second half. So we focused on basically guiding Q3 only.

Okay. That's helpful. And then in terms of that business how concentrated are you with you large customers, especially the ones that are here in U.S.? And I think historically you guys have strong position in some of the Asian base supply, equipment supply as well, any color you can provide in terms of how they progressing or how your business are progressing with those customers?

Sure, to the extent that I can talk about details. Obviously we are supplier to only OEMs in the world. Our content depends on unique applications that we have in those various OEMs. Obviously when we look at the wafer fab equipment industry, our demand is driven by both U.S. players and Asian players as well. Our concentration right now is higher in the US than in Asia, but our Asian content continues to also increase with the growth of local OEM industry in those countries. Etch has been a growing component of the business. Obviously, with the push-out of EUV, the proliferation of mutli-patterning technology; there is an increase in content both in PECVD and etch. Also we have new technologies like plasma enhanced ALD where AE is a significant supplier of this technology worldwide. All these applications obviously help us accelerate our growth year-over-year and again as the industry continue to migrate to next technology nodes, we expect to see growth coming primarily from these applications. I hope I answered the question Edwin.

Actually that's a very good color, thank you. And then I will ask a last question that you know I always ask but, on the service side of the business, I think we’ve seen a quite few of your customer costs aren’t reported higher service or a spare revenue from them? And I know obviously that first half of the year you simplified your credit -- increased a little bit. Is that a trend that we should expect, should we expect more year-over-year growth on the service business as we go through this year and next year?

Good question Edwin, what you see here in Q2, and I also believe in Q1 as well. We saw a combination of two drivers for service growth. One, our unique contracts we got awarded in the inverter business for upgrades and special projects that are not recurring that runtime , but at the same time we see amount of growth in service coming from precision power products, mostly from semi. And the driver for the growth, we basically, our plan is to continue to grow going forward. The driver for the growth is not very different from some of the growth numbers you have seen from some of the other companies in the industry and our customers as well; is gaining share back from third-party repair shops and bringing repair operations back to our company, because of the value-add we bringing in our high quality, high reliability repair. We also see obviously increasing demand, because if capacity in the market or utilization in the market. And in addition to that we see an incremental growth coming from the non-repair side of the business what we call value-add sales, which is serving the repurposing and refurbishing side of the business, addressing legacy products like 200 millimeter wafer fab equipment that has been growing recently because of MEMS and sensors as the Internet of Things become more pervasive. We are seeing investment in what we call lagging technology for which we provide power supplies and services for repurposing older equipment into today's technologies. So to make this long answer short, we expect to see continuing growth, organic growth from the Precision Power product.

Our next question comes from Jairam Nathan with Sidoti. Your line is open.

Just continuing on the services business, how does the increase, I know some of that is one-time, but how does that impact gross margins you think going forward? And would you need to invest more and hiring employees more to sustain that growth?

So service revenue obviously is one of the key contributors to our margins improvement. We are very scalable. We have global repair operation and service operations in key world locations. Our fixed cost is pretty much fixed and reflects our direct labor based on the number of units we need to repair and it’s very flexible and it’s very agile, it allows us to reflects up and down if we need to, because the only added costs to support the growth is direct labor. So it’s a very flexible operation. The one area that is more attractive to us, obviously is the value-add sales, which is going beyond the repair operations and help our customers with repurposing and reuse of capital, providing used equipments and upgrade services et cetera, for which obviously these are a high value-add for our customers and for us as well.

Okay. And the second question is regarding the mix. Now the precision power business has about 70% semi, 20% industrial and 10% services. What's the long-term goal, I mean what's the goal on the mix here?

Obviously as we stated in our strategy discussion during the Analyst Day we talked about focusing our growth on industrial applications while continuing to increase our share in application space, applications in the semi world. We are the leading provider for power supplies for the semiconductor industry. We continue to add presence in this market organically and inorganically. Just to remind everybody when we went through the acquisition strategy in a industrial world in high voltage, in addition to adding additional serve available market in industrial world, we also inherited high voltage applications in the semi world. That took us to applications we never had before such as iron implementation or inspection and metrology. We will continue to focus on preserving and strengthening our position in a core market, but at the same time our plan is to grow in the industrial power world where we provide, for those applications we provide highly engineered enabling application for critical power solutions.

Our next question comes from Jim Covello with Goldman Sachs. Your line is open.

Hi. This is Chelsea German [ph] on behalf of Jim. Thanks for taking the question. As you are winding down the solar business, can you talk about how we should think about changes to seasonality and which quarters may now be stronger or weaker relative to history?

Well, as we wind down the inverter business, we expect to see a decline in revenue, but at the same time a decline in our expenses. I don’t expect any growth in that area. We don’t expect to see impact of seasonality on our business because what we are doing right now is getting rid of inventory; raw material inventory, finished goods inventory and we have customers that are interested in last time buy. They are interested in buying as much as they can to make sure that they can complete their projects. And that's why I do not believe that we will see the strong dependence on seasonality, I think we’re going to see more dependence on availability of products we have and the demand comes from our old customers through last time by.

Got it and then as you’re seeing or several customers or several peers have talked about weaker industrial, so are you seeing any change in inventory demand from industrial customers based on the macro?

What we see, right now we expect as we mentioned in the prepared remarks, we expect to see contribution in the second half from the industrial world. What we see in the industrial application space is a very large mix of applications, markets and customers, which obviously moderate any cyclicality; our industrial market or business continues to grow and is more stable than the semi business historically, because of the diversification of the applications the customers we serve.

[Operator Instructions]. Our next question comes from Pavel Molchanov with Raymond James. Your line is open.

So I’ve taken out of the fact that you have not made any acquisitions since the start of the year and I wanted to ask is that because of the kind of distractions of the inverter process or was it because there has simply been a lack of attractive acquisition targets that you’ve identified?

The answer is a combination of a focus of the management team doing the first few months of the year on looking for strategic options for the inverter business, focusing on getting the best we can out of the assets we have; but if the same time as we announced recently we have a corporate development executive in our team right now and he is working and developing and working with a pipeline of opportunities. We remain very acquisitive. We remain focused on growing the business both organically and inorganically. Obviously from all the targets we look at we need to make sure that the targets we go after fit the mould of the profile of the targets that we believe well fit our strategy. The acquisitions we made in 2014 in the precision power product business were very successful and we're very happy with the performance. They contribute to our EPS and we will continue to pursue other opportunities in the same rigorous process we applied in our path.

And just thematically in the past you have talked about focusing the incremental M&A dollar on verticals outside of semicaps, on the specialty industrial verticals. Is that still the emphasis or has that digested?

That remains an important part of the strategy, because of the combination of the targets we have and our size. Obviously as I mentioned during the Analyst Day if we will identify a transformative acquisition that we believe will make a major change for the company, we will not hesitate to find a way to finance that acquisition and go for it. But as we look at the industrial world and in specialty application spaces we pursue, we see a lot of small size opportunities out there that we believe will really fit the strategy and fit the mould on a profile of targets we look at. I hope that answered that question, Pavel.

No, that's clear. And just I do not think if you have an internal target for this specifically by -- are you looking first for semi-cap to be up particular percentage of your business?

We did not decide on a specific percentage of the business going forward. We understand that the semiconductor equipment market is becoming very efficient and consolidated. We want to make sure that we accelerate that growth expanding beyond that market. We are a big fish in a small pond and we are trying to add more through our ponds, and to continue to grow in other areas.

Our next comes from Mehdi Hosseini with SIG. Your line is open.

Thanks for taking my question. Most of them have been answered just sort of a purpose of modeling and looking into second half of 2016, can you help us with kind of operating margin that would fully bake in the divestiture of inverter and also the positive impact on the lower overhead?

Sure. Well, first of all that's why we have provided the additional non-GAAP information so you can see in that column our results, as if inverters were not part of the ongoing business. That will give you a good feel for what is it today.

So for second half of 2016 as you just take out the 4 million to 5 million of overhead that would go --

So let me explain. So the one change is, right, we’re in a transition. There are some standard costs and that’s the 8 million to 10 million. Now the 8 million to 10 million is included in those Q2 results of the business excluding inverters. What I was saying in our script was basically that we expect half of that 8 million to 10 million of costs to be able to reduce by mid-year 2016. So this is going to be a gradual process to have a cost reduction of 4 million or 5 million from those standard costs. And a lot of that is very simply things like outside service provider, IT hosting, there is a lot of external contracts that are similar to user dependant, volume dependant and they take a little time to work through but they’re very-very achievable.

And then do you expect us to focus on these kind of pro forma earnings, because you’re running the business focused on scaling to 0:40:31.6 [indiscernible] and winding down the inverter business. So looking into 12 months to 24 months out, it’s the pro forma earnings that should matter and reflected in the consensus. Correct?

Right. That column in the new schedule versus inverters -- that should basically go away by the end of the year. There might be some trailing results into the first quarter, so that’s the piece that will not -- our plan is not to be there end of the year, end of March 2016, you’re correct. So when you look at the business result excluding inverters, that’s the continuing business.

[Operator Instructions] Our next question comes from Edwin Mok with Needham & Company. Your line is open.

I actually have follow up question on that pro forma number that you have. Now look at the three months pro forma ex- 0:41:34.3 [indiscernible] operating income and then the six month number, very-very strong operating margin. But it seems like your June quarter operating margin may have come down a little bit from the March quarter. What colum -- you know?

I mean, I think Q1 for that column was just very strong. It had higher revenues, therefore ahead higher absorption. So you’re correct, looking at this schedule, there is a slight decline and it is apples-to-apples.

And then so going back to your $4 million to $5 million cost, you can say beyond the inverter -- so looking at these number though, we should assume, which way we would get to that point by second quarter ‘16 or sometime around that timeframe?

Yes, I would expect by the end of the year that this amounts related inverter column will be very small and what’s going to happen is once that becomes very small, most of the assets are sold, you know that actually we're going to discontinue the operations and then all you’re going to see is result from continuing business going forward. So you may see this column on December 31st, numbers as well, the fourth quarter will still have numbers, right because we’re still winding it down. For the March quarter, you may see the column that will be very small. Probably at the end of March is when it would go into discontinued ops per plan and then really everything would be restated to be the continuing business. Does that help Edwin?

Yes, it does. And I also noticed like your operating margin has actually improved from last year number on the ex-inverter side, right? Did you guys do something to improve the operating margin or is that just a business improvement in general?

Well, it's a huge improvement, right that's like a 50% improvement and a 28% increase in revenue. So, yes, I think it's a lot of things right. I mean obviously it's higher volume, higher manufacturing efficiencies, but there is a continuing cost improvement activity going on at AE and all these things. And that's what you want to see right, 28% increase in revenues 58% in increase in op income and actually the three acquisitions; we've looked at those, what was intended for the acquisitions financially what we’re getting. They're on track. They are contributing, so really good story in the column of amounts including inverter.

Thanks Tom. Edwin, this is great question. As we acquired these incremental about $50 million of incremental revenue, we immediately started to write synergies. And driving synergies of these acquired entities obviously increased our profitability. Also our product mix has changed as we introduced new products for advanced applications and new products with advanced capabilities; we have increased our average gross margins of our app, in general of our products. So it's a combination of product mix, new products, new technologies, synergies through the acquired entities altogether helped us increase our profitability, in addition to continuing to drive lean across the operation and the worldwide organization.

And I’m showing no further questions. I’ll now turn the call back over to Yuval Wasserman for closing remarks.

I’d like to thank everybody for joining us today. Thank you for your questions and looking for to see all of you in the near future. Thanks a lot.