Good day ladies and gentlemen, and welcome to the Advanced Energy Industries Second Quarter 2016 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 be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to hand the conference over to Annie Leschin, Investor Relations. You may begin.

Thank you, operator, and good morning everyone. Welcome to Advanced Energy second quarter 2016 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 Web site at advancedenergy.com. Before we begin, I would like to mention that AE will be presenting at the Pacific Crest Global Technology Leadership Forum in Vail, Colorado on August 8, and at the Credit Suisse Small & Mid Cap Conference in New York on September 14th, and at the Dougherty Institutional Conference on September 28th. 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 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 GAAP and non-GAAP results. Non-GAAP measures exclude the impact of stock-based compensation, amortization, restructuring cost and significant non-recurring items. A reconciliation of non-GAAP income from operations and per share earnings is provided in the press release table. We will be referring to earnings slides posted on the Investor section of our Web site. 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 second quarter conference call. Continuing the momentum of the first quarter, AE had a particularly strong second quarter that exceeded expectations, driven by strength in all of our applications. Our semiconductor and service businesses posted record performances and our industrial markets rebounded as well. In total, revenue grew 15% sequentially to nearly $119 million. At these levels, our advantageous cost structure and financial model generated a 33% increase in non-GAAP EPS from the first quarter. We ended the quarter with $215 million in cash, having generated over $30 million. With a focus on leveraging our leadership in highly engineered Precision Power solutions for critical applications in semiconductor processing, thin films, industrial power and specialty power applications, we are progressing towards our three years aspirational goals of $600 million to $700 million in revenues, $3 to $3.5 in non-GAAP EPS and $200 million to $300 million of cash generation. Building on our recent design wins, and the resulting growth trajectory we saw in the first quarter, our semiconductor business reached its highest revenues yet at $78.6 million in the second quarter, a 13% sequential growth. Our results are performed initial expectations in the broader wafer fab equipment market. Technology upgrades in DRAM, 3DNAND and capacity expansion to semiconductor manufacturers led to renewed demand, increased order activity and pull-ins from some of our OEMs. Much of the growth we are experiencing today is a direct result of the designs won with key customers over the past two years. New power technology aimed at advanced deposition and etch applications is materializing into revenue growth as the industry transitions these applications to high volume manufacturing in memory and logic. This transitions particularly 3DNAND, are positively impacting the industry as a…

Thank you, Yuval. Record sales in semiconductor and service together with the recovery of our industrial markets led to total revenues of $118.8 million. The leverage in our financial model was apparent this quarter as non-GAAP earnings per share increased 33% on a 15% sequential increase in revenues. Non-GAAP operating margins improved to 27.8% and non-GAAP EPS improved to $0.73. Turning to sales by market, semiconductor sales increased sequentially by 12.7% to $78.6 million, as the upward trend continues. With the rebound in our industrial markets from a low first quarter and our ongoing initiatives to expand into new applications, industrial sales grew 34% from the first quarter to $22.2 million. Service revenues reached an all time high of $18 million in the quarter, increasing 7.5% over last quarter and 4.5% year-over-year. We continue to expand our capacity and geographic footprint capturing additional market share. The upward trend in revenues drove increased earnings power. Second quarter non-GAAP operating margin increased to 27.8% from 25.3% in the first quarter. Non-GAAP EPS was 33% sequentially to reach $0.73 in the second quarter compared to $0.55 in the first quarter. Commensurate with our strong revenues, total operating expenses increased 6.3% from the first quarter. Our ongoing commitment to maintaining our technological lead, strengthening our global marketing channels and expanding our service capabilities with new geographic locations are important investments to ensure our ability to meet our customers’ rapidly evolving needs. As you know, we have been actively pursuing acquisition opportunities. Focus primarily on expanding our SAM in industrial markets. We continue to narrow our pipeline of opportunities to those that meet our criteria for growth, expansion and profitability, while delivering the best possible returns to shareholders. The tax rate for the second quarter was 12.5%, down from 15.7% in the first quarter. We…

Thank you [Operator Instructions]. Our first question comes from the line of Joe Maxa of Dougherty & Company. Your line is now open.

Congrats on a nice quarter. Yes, a question on the semi side, slight pause, looking at Q3, I know you don't guide further out. But are you getting any sense there could be a bigger pause in Q4? Or do you think we will continue to see some pretty healthy levels in the business going through this and next year?

So let me address this. First of all, let’s talk about Q3. We had a uniquely high Q2 driven by significant pull-ins by some of our OEMs that the positions material for an accelerated growth they expected to see in Q3. As you all remember, usually we provide our supplies to customers, and it’ll be ahead of their delivery time, could be up to a quarter. So that increase in Q2 was driven also by a lot of pull-ins for the last -- during the last month of the quarter. Long-term, we are constructive going forward very much in line with what we read and heard giving SEMICON West. We expect that the semi industry will continue to equipment company industry we’ll continue to grow well in Q2017 as we heard from customers and stakeholders and analysts to in SEMICON West. I hope that answer the question, Joe.

Yes, that does. Thank you, very helpful. And then…

And one more comment Q3 when we say slight pause, it does not mean a meaningful decline, it's mean -- we believe it will be flattish with semi. Overall, we expect the business to grow.

Right, I see that. And along those lines on the industrial, the strength you are seeing given your guidance, suggests you'd see a nice sequential pickup in the industrial side of it?

That is correct.

Thank you. Our next question comes from the line of Edwin Mok of Needham & Company. Your line is now open.

So, first, just kind of following up on the industrial, I think you've always said that there was a number of the OEM design wins that you guys secured this past quarter. Is that the driver for industrial growth? Or is that one of the bigger driver of industrial growth? And just kind of along the line, we also heard a lot of investment around that. Have you seen those investments starting to drive your business in the second quarter? Or is that more the back-half of this year?

For us I think that second half will benefit from OLED. We are seeing demand for our product from current customers and also new customers that we have secured project based purchase orders in new areas such as Asia and EMEA. So, overall, as we previously stated in other public settings, we are a supplier to the OLED industry. We’re supplier to a lot of the major cathedral equipment manufacturers. And we expect to see the benefit coming from that, OLED, LCD and touch panels, during the second half.

And another piece in the industrial space that I think you guys highlight was the mass spec. You expect to see share gain and eventually driver for growth. I was wondering, any way you can maybe quantify the opportunity there, either just on mass spec or maybe mass spec plus X-ray. Sounds like those are the two areas that you guys are focusing on. And given that those are more design win type of business opportunity, I would imagine similar to semiconductor you how win the design a period down the road, you might see a more meaningful ramp up. So I am must trying to get a sense in terms of opportunity and how much those design win can translate to revenue long-term?

So I can give you while it take events or we usually doing upgrade down forecast. But in these specific areas in some of the applications we pursue we’re displacing incumbence. In some other applications we’ll pursue we basically go into new opportunities where our customers open the plain field for newcomers as they develop the next generation products, not very different from semi in that sense. Because again it's a design win business in many of those applications, the product is not off the shelve product, it's either customized or slightly derivatized product. And you can take between a year or two 18 months to get design and qualified. And that’s why we made the comment that the design wins we saw in Q2 in basically mass spectrometry and life science applications will contribute incrementally to our revenue in 2017.

Tom, I have a question on your guidance. If I did the math, it implies you should have 100 basis points expansion in your gross margin or that your OpEx is improving in 3Q? Can you help us out, how do you arrive your EPS or more one point in your operating margin guidance?

Thank you, Edwin for the question. We have a good operating -- we have good leverage in our operating model. So as revenues go up we cover our fixed costs, we’ve better absorption in our manufacturing but the same holds true for operating expenses. A lot of our operating expenses are fixed. So we do have leverage in the near-term. And that’s the way I would look at it. I’ll address our model because I can anticipate based on the report this morning that that’s the second question. But the way we view this is that in the near-term we do have leverage in the model. We are operating above our guidance range of 20% to 25% operating margin. Then when we look at that, that range is for the long-term. And the good news is we are investing in R&D, we are investing in sales and marketing, and we’re getting additional revenues. For instance this quarter we opened service facility in China. Our goal is to put our service resources close to the fab and that helps to drive the revenues. The other factors we consider longer term is that there is good business out there that has lower operating margins. And we don’t want to say set an artificially high hurdle for ourselves and have to not look at those opportunities. So, near-term, yes, we’re operating well to our model. There is leverage and long term that’s where we see it going.

So that kind of ties into my last question, so, if I do the math, your 3Q guidance already puts your EPS at $3 on annualized rates. That's less than $500 million revenue run rate, so why not update the EPS target, long-term EPS target?

I think its fine. We’re getting to our aspirational goals quicker than we laid out, and that’s a positive.

Edwin this is Yuval, we have with every structure and rigorous strategic plan process, which we are now in the middle of the 2016 for strategic plan process. At the end of our process, we will update our three years aspirational goals, and that’s how we operate.

Thank you [Operator Instructions]. Our next question comes from the line of Pavel Molchanov of Raymond James. Your line is now open.

Following up on a comment that you guys just made about the optionality of M&A, given that your margin structure is, in fact, running at or above the high-end of your targets, is there in a realistic prospect of M&A that would support the continuation of that, of your current margin structure? Or is pretty much anything that you could possibly look at it would be below average versus the existing business?

That’s a good question. So, yes, there are opportunities target companies that have similar margins to us. That said though, our hurdle or one of the things we look at with the potential target is something that has an operating margin in the low to mid-teens but coming into our model with synergies and global sales, synergies in the supply chain that we can raise them up to the 20%. So, yes there are those that are equivalent. In general, we’re looking for those people we can get up to the 20% margin range.

And then just a quick one on the SG&A line item, several quarters of SG&A kind of flat to down and then it kicked up by about $1.3 million sequentially in Q2. Should we expect that $19.4 million to be the next run rate, or should it tick back down?

Generally it will be taking up the second half of the year, maybe a little below that. We did have some expenses through a very positive activity, our service tenure in China. But generally expect S&M dollar to increase 19, probably a little on the high sight for the quarter. But that’s how we would model it.

Thank you [Operator Instructions]. And I am showing no further questions at this time. I would like to hand the call back over to management for any closing remarks.

Thank you everybody. Thank you for joining us today and we look forward to seeing you at the upcoming events. Thank you very much.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may disconnect. Have a great day everyone.