Good day ladies and gentlemen, and welcome to the Advanced Energy Fourth 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, today's conference is being recorded. I would now turn the conference over to Annie Leschin, Investor Relations. You may begin ma'am.

Thank you, operator and good morning everyone. Welcome to Advanced Energy's fourth 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 afternoon. For a copy of this release, please visit our website at advancedenergy.com. Before we begin I would like to mention that AE will be participating at the Morgan Stanley Technology Media and Telecom Conference on March 2nd in San Francisco. And we’ll also be presenting at the Susquehanna Semi Storage and Technology Summit on March 10th in New York. As other events occur, we will make additional announcements. Now, I’d like to remind everyone that except for 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 as 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 both to 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 slides posted on our website as well this morning in the Investor Relations section. And with that, I’d like to turn the call over to Yuval Wasserman. Yuval?

Thank you, Annie. Good morning everyone and thank you for joining us for our fourth quarter and full year conference call. With the completion of the inverter wind down in the fourth quarter, I would just like to mention that all references to financials reflect the continuing operations of our core Precision Power business. Following three years of consecutive double-digit compounded annual growth rates in revenue and operating income, 2015 was a strong year for Advanced Energy. Total revenues grew by 13% driven by record annual semi revenue, and GAAP diluted EPS from continuing operations climbed 20% year-over-year even as the semiconductor industry took a collective pause in the fourth quarter. Our solid cash flow allowed us to accomplish a number of key initiatives during the year including launching and substantially completing a $50 million accelerated share repurchase program and completing the wind down of our inverter business. We are now solely focused on Precision Power Solutions going forward. In the fourth quarter, total revenues decreased 21% from last quarter mainly due to softness in the semiconductor wafer fab equipment market. The decline in semi was moderated slightly by service revenues which reached their highest fourth quarter levels in core Precision Power service, all but negating the typical seasonality, and industrial revenues which remained consistent with last quarter. In total, fourth quarter revenue was $87 million, non-GAAP profitability was $0.32 driven by solid operating margins for our core Precision Power business. We put our cash to work during the quarter through the ASR and ended the year with a cash balance of $170 million. 2015 was a strong year in design win activity across our served markets. We made significant inroads in applications for our RF technology in semiconductors and we increased our SAM in a variety of markets. Our…

Thank you, Yuval. Before I begin let me just remind everyone that as of the fourth quarter all inverter revenues, cost, assets, and liabilities are reported in discontinued operations. The company’s financials have been recast for the prior two years to show the core Precision Power business. On slide 13 are the fourth quarter highlights of our continuing Precision Power business. The financial results were in line with our expectations. Revenues were 86.9 million, non-GAAP operating income from continuing operations was 20.7%, non-GAAP earnings per share from continuing operations were $0.32. During the quarter we completed a 50 million accelerated share repurchase program as part of the 150 million three year repurchase program announced in September. Including the ASR, we ended the quarter with $170.4 million in cash and marketable securities. Sale side market are shown on slide 14. Semiconductor sales were 50.2 million, a decrease of 29% year-over-year and 31% sequentially due to the industry wide pause in the fourth quarter. Industrial sales were essentially flat from Q3 at 21.2 million. My rating has declined in total revenues. Service revenues of 15.5 million were flat sequentially and decreased 9% year-over-year. The decline is associated with a small piece of inverter service business that we are continuing in order to support our customers installed units. Going forward, total inverter service revenue is expected to be slightly over 1 million per quarter. Excluding that portion service revenue from core Precision Power was the highest the company has experienced in the fourth quarter. Turning to slide 15, and the non-GAAP information. As a result of the fourth quarter decrease in revenues non-GAAP operating income and EPS also declined sequentially and year-over-year due to the lower volumes. We continue to make progress towards our goal of reducing by half the 8 million to…

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

Hi, thanks for taking my question and congrats for the good quarter. So first question I guess, just generalized question in terms of the semi cap you mentioned, you saw a double-digit growth for the quarter, if I take the midpoint, maybe around what 15%, 20% growth for this quarter. Do you think that level is sustainable beyond this quarter and do you think we could see more growth beyond that?

Hi Edwin, we expect to see a double-digit growth from Q4 to Q1 and we expect to see right now from our vantage point and looking at the key drivers, talking to the market stakeholders, customers, partners, we expect to see a continuing growth but not at the same level throughout the year. And if you look at the way we view 2016 compared to 2015, is a moderate growth in semi-wafer fab equipment. We expect to see different mix of products between the first half and the second half, but overall we expect a moderate growth between the years.

I see, okay. Good. Thanks. And then on the industrial side, you mentioned a number of wins which is helpful, but overall in terms of overall revenue, we haven’t seen much growth over the last few quarters, right. I was wondering if you can kind of give us some general sense when would those win kind of convert into revenue, and in terms of how do we comp – anyway we can now quantify it or give a sense in terms of how big each one of those [indiscernible] architectural glass, flat panel display, hard coating, or the other industrial if we can quantify roughly how big is sub segment within this whole industrial group that you are reporting?

Okay let me start with design wins, normally in the semiconductor equipment business, the transition between the design win and mass production, mass volume can take up to two years and sometimes even longer, depends on the application, depends on the adoption and the transition of the market to the end product ramp. So a lot of the growth that you see today coming from for example Q1 revenue that is driven by foundry investment and next year's transition into more 3D devices, this design wins were made 18 months ago to 24 months ago. Some of the design wins that we continue to win are a different application, different mix, and different world regions and obviously are affected by the mix of the revenue generated by those OEMs. That’s for the semi. On the industrial world, it’s very, very mixed and we don’t break it down to its components. We have some cases where design wins take longer than normal industrial similar to the semi world, especially in highly regulated industries like defense, aerospace, and medical. In other industries or applications, design wins can take a few weeks and convert immediately to revenues. So it’s a very -- it is a mixed bag.

I see, okay. That’s helpful color. On the 1Q guidance with the revenue recovering – revenue recovery should I assume gross margin will get back to the low 50s level that we have seen over last few years, and then as your volume increase assuming like you said the semi continuing overall, how do you kind of think about gross margin longer term, is there any way you can give us some long term yardstick or target as volume increase?

Yes, I’ll ask Tom to answer about profitability.

Hi Edwin, we focus on operating margin and we think of it in terms of 20% to 25% on a non-GAAP business basis. And the 20% will be our lower volumes, more when we are closer to $80 million of revenues in the quarter. And as we approach a 100 million, it would be the 25%. If we exceed a 100 million or if we had very good product mix, then we can also be over the 25%. We tend not to look at gross margin and operating expense because through our movements between the two and the true measure of profitability that we feared everybody inside the company is on our operating margin. Make sense?

Okay that’s helpful. Lastly, just cash on balance sheet, you guys always have quite a bit of cash on balance sheet and you have a capital return program but you also talk about reinvesting, so I assume M&A is still on the table or these acquisitions are still on the table, anyway you can kind of give us some sense in terms of how do you kind of think about acquisition, does it have to be accretive and is this all pretty margin target that caused high level target when you look at a business to acquire?

Two pieces to the answer right now. We are looking right now at target acquisitions that will allow us to diversify and expand and grow in new adjacent markets, in new markets and applications. Obviously opportunistically if there are acquisitions that are in our current space that meet our very rigorous screening process. We can entertain those as well. We do manage a healthy pipeline of opportunities but the important thing is we had a very, very rigorous process of screening and measuring and making the right decisions when we pursue an acquisition. In the Precision Power product group, during the last two and half to three years we acquired four different product lines or companies and all of them were accretive very quickly. All of them contribute and continued to contribute and they continued to grow in new world regions and applications. So we're very happy with the track record of the Precision Power product group and we are very vigorous in the way we approach those in terms of making the decision and executing on the integration and acquisition. Tom you want to add anything to that?

I think that’s a good description. Though financially we have targets short-term and long-term with their guidelines. In the short-term we’d like any acquisition to be really equal or better than a share repurchase and over the long-term we want them to be greater than the 15% return on our investment. Those are guidelines, that’s how we filter and decide which acquisitions to take to the next steps.

Okay, great. That’s all I have. Thank you.

Thanks, Edwin.

Our next question comes from Joe Maxa with Dougherty & Company.

Thank you, good morning.

Morning, Joe.

Hi, so on the industrial side you talked about a bit of softness in the Q1, I understand the different moving pieces, but let’s – how do we look at it moving through the year and are you seeing any macro concerns related to the segment?

Good question. So the softness we expect to see in Q1 in industrial is driven by the fact that we had a strong Q4 and some of the large investment made in glass and hard coating are being digested by our customers. In 2016 we are going to be exposed to macro economical forces and one of the areas that will affect our glass business is what happened in China for example. As the market declines in terms of investment and infrastructure, we expect to see softness in glass forming, in glass coating applications, but at the same time we are driving to compensate for that by going back and retrofitting old glass coating lines with new technology. So we're addressing the market by allowing the end use customers to repurpose and upgrade their capital equipment. In large you can look at our industrial market as driven by GDP.

I see, okay. That’s helpful. And then just on the solar inverter related service revenue, you said $1 million going forward per quarter, is that -– how long do you expect that to continue, is that -– I mean it sounds like long, several year….?

Sure, that will continue well into the future, I mean beyond 2016.

Okay. That’s all I had. Thank you.

Thank you, Joe.

Our next question comes from Mehdi Hosseini with SIG.

Yes, thanks for taking my question. Yuval, I want to go back to your commentary on the -- in terms of semiconductor. Over the past couple of years, your quarterly revenue has picked in the low $70 million and your OEM customers have talked about a flattish WFE spend this year. So with that background would you be able to hit those peak quarterly revenue given what your customers have communicated over the past couple of weeks?

I'm not sure, I understand, Mehdi, the question. What we…

Let me rephrase that. If you look at past two years your semiconductor revenue has peaked in the low $70 million per quarter, $70 million to $72 million. And you're starting the 2016 with a really very strong sequential growth. And since your customers have talked about a flattish WFE spend environment, I'm trying to understand if you would be able to hit the prior quarterly revenue run rate of $70 million to $72 million.

Okay. Now I understood the question. Thank you, Mehdi. Two things, number one, if you look during the last few years from 2012 to 2015 we have demonstrated a growth rate that is higher than the wafer fab equipment market so we continue to deliver on our mission to grow faster than the market we serve. Now the main driver, there are few drivers for that right. Obviously our concentration around power solutions that serve the deposition in the etch market allow us to serve in an application space that grows faster than the market because of the migration to new technologies. We also added new applications over the last three years, applications that we never had before, the high voltage power supplies that go to ironing plantation, to wafer methodology and inspection. These are applications we didn’t have historically which basically created an incremental growth and incremental space or serve available market for the company. In addition to that we expect through the combination of higher than the market growth in the deposition and etch, higher RF content in these specific applications combined with market share gain in some areas that we will continue to grow faster than the wafer fab equipment. So the question is do we believe we can go back to the historical levels that we had in the past, that’s our plan and exceed that.

Okay, got it. So my takeaway is that you should be able to hit those historical trends given increased application for your products. Now question for Tom.

We plan to meet or exceed the historical level.

Got you, okay. Thanks for detailed color. And the question for Tom, you mentioned operating margin target of 20% to 25%, I want to be able to understand the drop through especially if your overall revenues exceed 100 million and can you quantify what would happen for every dollar of revenue to the operating profit as you exceed $100 million run rate and I am asking you for operating drop through not a specific margin?

You know rather than quantify it, Mehdi I think if you look at 2015 you look at some of the quarters where we were over a 100 million. You’ll see that we were 26%, 27%, I think one quarter we were at 30%. Okay, so there is a lot of leverage in our model which we are very excited about. But that’s the way to think about it.

Okay, so anything above 100 million I should assume it is 30% up and drop?

No, anything over a 100 you should assumingly have good product mix or similar product mix, we should be over 25%. And my reference to 30% was that, in one quarter no we had very good revenues, and we had a very good product mix and we did hit 30%. So when you look at what's possible, yes on a very good quarter 30% is possible. But I would tend to look at for modeling, look at the last four quarters, we track it, in fact I think posted on our website is our last investor relations presentation. And we show you the last eight quarters in the operating margin and you can get a pretty good feel for model wise where we would be at different levels.

Got it and one last item, what is the CAPEX spending for this year?

Think of our CAPEX spending between 4 million and 8 million. We’re company that doesn’t take a lot of capital to, which is really a good thing. And if you looked at it, we take our balance sheet and look at our return on equity for 2015 continuing business it was 31% I believe. So we have very good profits, very good generation, plus we don’t use a lot of capital so when you look at return on our shareholders equity that’s quite high.

Got it, thank you.

Thank you.

Our next question comes from Pavel Molchanov with Raymond James.

Hey guys, thanks for taking the question. One more on the M&A front that you guys already addressed, you referenced some of the stress in some of the industrial value chains, certainly China comes to mind. In that context are you seeing potential M&A multiples coming down or is there still a bit of a bid-ask spread, let’s say?

It’s a great question, Pavel. What we saw this year and currently, in comparison to recent acquisitions we have completed in 2014, we see that the multiples right now are significantly higher. We can’t predict what will happen going forward into 2016, but I can tell you that if you look now, on average in the industrial world we see typical multiples of 8 to 10 times EBITDA for industrial acquisitions compared to much lower than that, that we paid when we acquired the companies we did. So there is a higher, more frothy multiples right now. I really cannot predict what will happen in the future but that’s the picture right now. Now obviously, as we apply our very rigorous evaluation process, we’re very careful to look at, as Tom suggested, we're looking at the short-term and long-term return and we're very diligent about that.

Okay. And then on kind of broader uses of cash, now that you're a pure Precision product, semi-cap focused company and many of your peers of course pay dividends as it stands, are you at all open to initiating a dividend?

We are always reviewing our capital deployment plan and right now we are focused on share repurchases, bring down the share count meaningfully and completing the $150 million authorized program. So that’s not a no, that’s -- right now, we're focused on repurchases and getting through the program and we think that has a lot of shareholder value. But we're -– we continually evaluate and we're open to alternatives.

Alright, appreciate it guys.

Thank you.

[Operator Instructions]. Our next question comes from Weston Twigg with Pacific Crest.

Hi, thanks for taking my question. Just real quickly following up on inverter services, it looks like some of the numbers have been shifting around on past quarter’s Q3, maybe we added a couple of million dollars. How much was in services related to inverters in Q4, just for reference?

About $1.5 million.

$1.5 million, okay, and then that just drops to $1 million moving forward, got it.

Yes.

Then looking to the operating model, R&D was really low in Q4. Is that same kind of a low number, a good number to use moving forward or does it fluctuate with the revenue moving forward?

Well, that’s a really good question, so let us explain that. If you look at our 2015 full-year income statement, what – and you look at our operating expenses, what you should expect in 2016 is that there are additional cost reductions in the G&A, which you see as SG&A. And the G&A will come down by about a 100 basis points. And our intent is to reinvest just about all of that into R&D and sales and marketing to expand our presence for the industrial markets. So you will see a shift of lower G&A and clearly higher R&D spend and higher sales and marketing spend in 2016.

We're investing for growth, Wes.

Got it, that’s helpful. And then just, I want to come back to this operating margin target of low-to-mid 20% range, because it feels like it’s the wrong number. Given that last year, I think you were showing something like 25% to 27% x inverters, your tracking ahead. Even on a really low quarter last quarter and you gave us some more color on the call but you were still over 20%. Moving forward is that -– should we really be using something in the 25% to 30% range moving forward or is there something that’s holding you back from going that high?

Well, Wes, this quarter we're at 20.7%. So I mean I think you do see that we're -- we used that range.

Fair enough, but you have had a lot of quarters over a $100 million, and it feels like…

We clearly have upside and we have potential for over 25%. That’s very true.

Got it. Alright, thank you.

Wes, it is strongly dependant on the mix and as you know in our industry we have changes in volume and mix quarter-by-quarter especially now as semi become concentrated and investments are more lumpy. And that mix will impact obviously our operating income and both volume and mix will affect that. Do we have the opportunities in the future to exceed 25%, yes. Should we bank on that as a standard, I wouldn’t suggest that.

Helpful, thank you.

Our next question comes from Edwin Mok, Needham and Company.

Hi, thanks for taking the follow-up. Just quickly on foreign exchange impact, I guess two part question. Given that most of your manufacturing is in China and the weakness of Chinese Yuan does it help you in gross margin and then secondly I noticed in the fourth quarter you guys had pretty large I guess interest and other expenses, right, was that foreign exchange impact and should we expect that to continue going into the New Year?

Yeah, a couple of things. In general foreign exchange for Advanced Energy, it really hasn’t been material and I would expect that to be the same in the future. With respect to gross margin and China, yes it does help but keep in mind a lot of the material is in U.S. dollars anyway. So, it is not -- again it is not a material help and interest seeking expense. Yes there is a piece of FX, there is also amortization of our credit line cost in there. So, overall Edwin, the way our contracts were structured with customers, the way we priced the denomination of some of our cost of sales it hasn’t been a material swinger and we expect it to be -- remain stable in our income statement.

Great, that is all I have. Thank you.

Thank you.

And I am not showing any further questions at this time. I would like to turn the call back to Yuval.

Thanks everyone for joining us this morning. We had an exciting 2015. We are looking forward to a better 2016. Looking forward to seeing most of you in the upcoming quarter. Thank you very much.

Ladies and gentlemen this concludes today's presentation. You may now disconnect and have a wonderful day.