Good day, ladies and gentlemen. Welcome to the Advanced Energy First Quarter 2017 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions]. As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Annie Leschin. You have the floor.

Thank you, operator, and good morning, everyone. Welcome to Advanced Energy’s first quarter 2017 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 www.advancedenergy.com. Before we begin, I would like to mention that AE will be participating in a few conferences this quarter; the JPMorgan Global Technology Conference at May 24 in Boston, the Stifel Technology Conference on June 5 in San Francisco, and the Citi Small & Mid Cap Conference on June 8 in New York. As other events occur, we will make additional announcements. I’d like to remind everyone that except for historical financial information contained herein, matters discussed on this call contain 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, plan, objective, 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 on 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 in yesterday’s press release. Guidance will not be updated after today’s call until our next scheduled quarterly financial release. 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 non-cash related charges such as stock-based compensation, amortization of intangible assets and restructuring costs, as well as acquisition-related costs 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 will be referring to earnings slides posted on the Investor Relations section of our Web site as well. 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 first quarter earnings conference call. The first quarter of 2017 continued what has been an exciting time and an incredible run for AE in the semiconductor capital equipment industry in particular. Significant demand for our enabling power conversion technology for advanced semiconductor applications again grew to record levels. Together with rebound in our industrial applications, total revenues increased 45% year-over-year and non-GAAP EPS grew 89%. Our ability to consistently manufacture and deliver high engineered production device and services to our customers during this unprecedented ramp in demand is a testament to our organization’s commitment to operational excellence. All of this allowed us to deliver impressive results with first quarter revenues of over $149 million, non-GAAP EPS of $1.04 and nearly $43 million in cash generation. Semiconductor revenues increased over 50% from last year to $105 million. Accelerated demand in advanced memory devices primarily in mobile handset and solid state drives combined with a strong performance from our Korean OEMs led to our fifth consecutive quarter of record semiconductor revenue. Together with a ramp of 1X nanometer Logic, the considerable investment in 3D NAND is driving much of the growth both in fab capacity expansion and next-generation technology development. As the industry moves to increasingly sophisticated 3D NAND devices with additional layers and challenging architectures, more complex deposition and etch equipment is required. Advanced Energy is playing an important role in delivering high engineered [ph] precision power supplies for these new processing tools. A key driver of our success comes from continuously investing in R&D and winning new designs in these fast growing areas. This quarter, we saw a broad set of design wins in semiconductor applications for customers in Asia and the U.S. Advanced 3D memory…

Thank you, Yuval. The first quarter marked the fifth straight quarter of top line growth. Total revenue was 149.4 million, up 10.3% sequentially and 44.9% from a year ago. Non-GAAP operating margin was 31.9% compared to 30.7% in the fourth quarter and 25.3% last year. We generated 42.7 million in cash from continuing operations. Over the past year, we have seen a nearly 50% increase in business. Our ability to quickly respond to customer demand, manage our development projects, leverage our costs and improve working capital is a testament to our highly efficient organization and commitment to customers. Both semiconductor and service revenues reached new highs this quarter. Semiconductor sales increased 8.1% sequentially to 104.6 million due to ongoing industry-wide momentum and the critical nature of our products. Service revenue rose 5.5% sequentially reaching 20.5 million as more and more customers recognized the competitive advantage that our service offerings provide in lower total cost of ownership. As expected, industrial sales bounced back significantly from the fourth quarter increasing 26.9% to 24.2 million. We continued to aggressively pursue strategic opportunities in industrial markets to expand our TAM, smooth out the cyclicality of our business and increase the quality of earnings. We would like to reach the point where one-third of our total revenue comes from our industrial business. Non-GAAP operating margin for the quarter of 31.9% exceeded our guided range and is a 660 basis point improvement compared to 25.3% in the first quarter of 2016. Of this, 90 basis points came from cost of sales and 570 basis points from leveraging our operating expenses, specifically SG&A. The benefits of the business process improvements we have made are paying off as we scale our business. For example, we expanded the use of our ERP system around the globe, consolidated our administrative…

Ladies and gentlemen, the question-and-answer session is now open. [Operator Instructions]. We’ll be taking our first question from the line of Edwin Mok from Needham & Co. Your line is open.

Great, guys. Good morning. Congrats on a great quarter. My first question’s on the semi cap side of the business. Based on your guidance with flat to up sequentially on the second quarter, I think you mentioned – it sounds like from your comments you are seeing some supply chain challenges at your customer that’s limiting the sequential growth. Can you maybe give a little more color around that and is there anything you guys can do to help that? And I have two follow-ups. Thanks.

Sure, Edwin. As you all know, our business is driven by our customer shipment. And as we see continuous growth in the business, some of the OEMs, definitely not all of them, due to constrains of their own capacity or their supply chain, non-AE suppliers, cause them to basically match capacity and accordingly plan their material of critical components such as AE, et cetera. That also was the reason why Q4 was so strong for Advanced Energy. If you remember last quarter, we had a significant growth in the semi business driven by our customers positioning the material for early shipment in Q1 and especially compensating for Chinese New Year. So what we see in our business is a reflection of our customers’ projected shipments not revenue, their shipment plan. So right now, we are really excited with the performance of the business and the company. If you look at the results of Q1 and the range of guidance for Q2, we are making huge progress towards our aspirational goals. And that combined with recent report from VLSI Research indicating that we have gained on average across our product lines 2.5 points of market share, it’s a great position to be in as we believe that the business will continue to grow through the second half and even through next year.

Okay, great. Actually that’s really good color. One follow up on your prepared remark you talked about strong performance from OEM. Are those wins that you guys have secured historically or are you just seeing to a customer basically seeing as we saw strong demand of Korea and therefore they are seeing a pickup?

The strength in Korea is I believe based on our recent information and what we view at the market is strongly influenced by the increase of investment in memory in Korea. And we see more business going to the direction of Korean OEMs. We are a player and a key supplier to Korean wafer fab equipment manufacturers and as the continuous increase in investment in memory in Korea, we saw significant growth in our revenue from Korea in the first quarter. I hope that answers the question, Edwin.

Actually it did. It was a good answer. Last question I have is on the non-semi side, I think how you mentioned the more power module business has on your partnership with Siemens that is helping your footprint there in China. Can you maybe provide some more color in terms of how that partnership works? And I understand that is a small part of your industrial business right now. Do you expect that to drive greater growth I guess longer term?

Yes, but let me qualify. Our industrial business is made of multiple small components, which is a good thing. We like it because it’s very diversified and it’s not very cyclical in aggregate. The power control modules that we acquired was mainly European-centric business and we grow it as we take these products to new world regions and drive them through our expanding our growing distribution channel. Part of our hybrid sales strategy also includes partnerships with what we call channel partners. One of them is Rockwell Automation. Today, Rockwell reps and user of the Rockwell Automation systems can select AE product through the Rockwell system or Web site. Similarly, as we continue to expand and drive partnership with automation leaders, we have teamed up with Siemens automation and Siemens is expanding our presence globally and more specifically taken us to China glass market. Now the glass market we serve with the power control modules is not [indiscernible] market but rather the glass melting and float business which is for us another layer of TAM that we continue to increase and we add more product and technologies.

Great. That was really good color. Thank you.

Thank you. Our next question comes from the line of Joe Maxa from Dougherty & Co. Your line is open.

Thank you. I wanted to follow up on the semi strength. You had mentioned that you expect to see the business continue to grow through the second half and next year. So I was wondering if – I know you don’t specific color but it sounds like you’re talking the second half of '17 you think could be greater than the first half of '17, is that how I should read the comment?

We’re not providing guidance, Joe, for the second half. But right now reflecting the general sentiment in the market both in the investment market but also talking to our customers and their customers, as we stated earlier, we believe that 2017 will be a better year than 2016. And we also agree with the general sentiment that the investment and growth in memory will continue through 2018. Now if you look at the – right now based on the first half, right, our Q1 was a growth quarter, our Q2 was a growth quarter projected as we guide. And again, we believe that the whole year in general will be better than 2016.

Okay. That helps clear it up. I wanted to talk a little bit more about the industrial segment strength you’re seeing. I understand it’s very broad and you have a number of verticals but are there a couple of keys that are really – maybe go through that again on the keys that are really driving the strength in that business, if there are just a few?

Sure. I’ll give you maybe three examples of areas that we plan, strategize and see potential growth going into the future. In the OEM of industrial thin films, we continued to grow and expand our industrial coating applications. We have unique technology that enable manufacturers of hard coating equipment to perform decorative films that are very unique in terms of the color, composition and structure. And this physical deposition process is enabled by our unique power supplies. A lot of these decorative or tribological coatings historically were made using chemical processes. Now the chemical processes are limited in their ability to tailor the color, composition, strength and properties of the film. Migrating into plasma processes allow the manufacturers to create very, very advanced coating that are applied not only to industrial applications but today also to consumer products. We view that as a growth area for us. Another growth area for us has been and still is, is the high voltage product line. And within the high voltage, we focus on areas where we deliver a unique advantage. Mass spectrometry requires extremely stable and noise-free power, high voltage power. We have a new power supply that have a very low ripple into very accurate delivery of power, very stable but the other thing it has really high power density which allows our customers to have a smaller volume product. And as mass spectrometers move from large machine in labs into almost field deployed equipment and handheld devices for various applications, the need for high power density is very important. So we have unique advantage there and it’s an area that we continue to pursue and gain design wins. The last example again also for the high voltage application space is scanning electron microscopes. We are a critical supplier for scanning electron microscope that are being used both in measurement and inspection in a semiconductor industry and other industries. Our unique and very advanced high voltage power supplies enable the scanning electron microscopes to have the resolution and the capabilities required to move from one technology generation to another. I hope that answers the question, Joe.

That’s very helpful. Thank you.

Thank you. Our next question comes from the line of Krish Sankar from Bank of America. Your line is open.

Hi. Thanks for taking my question. A couple of them. First one, Yuval or Tom, I’m curious on the foreign exchange hedge. It looks like they were Euro-forward contracts and you guys said that it was a planned acquisition that did not come through. So curious to see is it number one in the Eurozone along the industrial vertical and what is the reason the acquisition did not happen?

Sure. It was an offshore opportunity. It was priced in a foreign currency which was volatile. We felt that it was – we want to lock it in, Krish. In the end there were some diligence items that we couldn’t get comfortable with that turned into a valuation issue and we decided not to proceed. That said, let me give you an update on M&A. We have a series of smaller opportunities in the pipeline. They’re very actionable. They’re mostly private, domestic and international. And although we can’t guarantee it, we do think that they’ll be coming to fruition in the near term.

Got it. And are these in the non-semi vertical?

Primarily, yes.

Got you. That’s very helpful. And then a follow up. I listened to your comments about how the full year is going to be stronger than last year and how things are still pretty strong. I know you guys don’t give guidance on September but just optically speaking, do you think September quarter semiconductor shipments that you guys are guiding [ph] revenues would be at similar level to June or similar level to March, or is it tough to forecast?

It’s early to say. We feel good about our coming quarter, Krish, and our revenues will follow with the industry primarily.

Krish, we are very excited about the year in general. We’re very excited about our progress towards our aspirational goals. In fact we’re doing better than the plan we presented just six months ago. Obviously as part of our very structured and rigorous planning process, we will complete the strategic planning process again in Q3 and Q4 and update our goals if needed. But we’re very excited about the progress thus far.

Got it. That’s very helpful. Then just a final question. How much was AMAT and LAN [ph] as a percentage of sales in March?

Those two a little over 50% approximately. It will be in our --

It will be in the Q.

Got you. All right, thanks, folks.

Thanks, Krish.

Thank you. Our next question comes from the line of Pavel Molchanov from Raymond James. Your line is open.

Thanks for taking the question guys. As I look at the global services segment there was a time maybe 12, 18 months ago when as a percentage of your semi cap equipment sales, it was 25% to 30%. This past quarter, it was less than 20% of semi cap equipment. And obviously the semi cap strength largely explains that. But as we think about the relationship between those two, is there essentially kind of a lagging effect where even if equipment slows down, global services will continue to pick up for the time being?

Pavel, we view the service as a much more stable business and less cyclical. Obviously, with the increase in fab utilization and increase in our installed base in our service offerings, we’ve continued to see growth and we have been growing this business quarter-over-quarter significantly. I will not necessarily look at the relationship between the revenue of products and the revenue of service because as you said there’s a lagging effect. Also, most of the new equipment that are being sold and shipped and installed is under warranty and equipment under warranty does not generate a revenue. So a lot of the revenue comes from equipment that is post warranty and for that reason if you think about it, we have a continuously growing installed base that creates a growing SAM and without increased development of engineered service solutions of products and gaining market share from third-party repair shops, we see this nice acceleration in growth. We also view the business as a growth business and continue to invest in engineered products and also in localized service center just like the one that we celebrated about two weeks ago in Xi’an, China. China see a significant growth in number of fabs existing and new fabs and the ability to operate locally in very close proximity to our customers allow us to be very responsive and very close to our customer needs.

Okay. And just kind of a housekeeping item on the income statement. There is a fairly meaningful amount of non-cash stock comp just about every quarter, but the share count both the basic share count and the fully diluted share count is almost identical to what it was three or four quarters ago. So where is that variance coming from?

The share count – actually we see it as creeping. It’s starting to creep. And the way I would look at this is that’s why we stick to the capital deployment plan. We haven’t done a share repurchase in four quarters. That’s still on our deck. At the minimum, we want to prevent a creep in our share count. The share count itself as you know when you look at diluted, it’s a formula that’s based – people still have options that sometimes go back 5 or 10 years based on the stock comp. It’s based on a variety of factors. But in the end, equity count is starting to go up and that is on our radar.

Okay, I was going to say it actually looks pretty steep to me but maybe creeping a little bit. All right, thank --

50,000 shares.

Okay, fair enough. Thank you, guys.

Thank you.

Thanks, Pavel.

Thank you. Our next question comes from the line of Mehdi Hosseini from SIG. Your line is open.

Hello?

Please check your mute button. Last call for Mehdi Hosseini. Looks like we’re not getting any answer from this line, so I’ll go on to the next question after giving everyone a brief reminder. [Operator Instructions]. Our next question comes from the line of Tom Diffely from DA Davidson. Your line is open.

Yes, good morning. Maybe first a clarification. It sound like you said earlier that some of your OEMs are reaching kind of maximum capacity right now and if that’s the case, what does that mean for growth in the semiconductor market going forward for you?

The comment we made was some OEMs have reached maximum capacity which mean their factories are full and their ability to build, test and ship products is maxed. In some cases, the max capacity is driven by their supply chain. So we don’t believe that that will be a showstopper going forward. I think that without talking on behalf of other companies I know that our investment in increased capacity across the board both through in-sourcing but also outsourcing. I view that as a temporary capacity utilization situation but I don’t see that as a long-term inhibitor for growth.

Okay, great. And it sounds like playing capacity to serve the customers’ needs.

That is correct. Our capacity right now due to our unique operational model will allow us to continue to grow through our strategic horizon without major capital investment.

Great. Okay. And I had a question on the 3D NAND side. When the players – when the customers move from the second, third to fourth generations, does that require different etchers – I’m sorry, power supply for the etch or is it just more power supplies, because there’s more etch steps?

It’s a great question. It’s both. As the industry migrate to more complex architecture with much more challenging aspect ratios and the structures, two things happen. Number one, some of the deposition etch processes will require more advanced power delivery systems and emerging applications that require different chemistries or different process steps will generate new set of tools that will require either existing or new power delivery systems. So all-in-all, as you indicated, the growth is not purely driven by capacity. It’s capacity and the migration to next-generation memory devices.

Okay, great. And kind of on the same lines, obviously great market share gains over the last year. So are you seeing the same competitors or is that list getting smaller and smaller at the leading edge nodes?

I think in general you have the very similar group of competitors in our domain that continue to compete. There are new very small scale mostly foreign companies that are I call it like operating the fringes and trying to enter the market. The barrier for entry is very high in this industry in general but in this specific technology in particular. So we don’t expect to see a significant change in the competitive landscape in terms of number of players. We do anticipate healthy competition continuing between the current players.

Okay. And then finally, Tom, when you look at – obviously the revenues are at or above your target model today. What are the margins of today look like versus kind of what your longer term plan is?

Well, the operating margins we have leverage in them and it’s mostly SG&A. So at higher levels of revenue, yes, our operating margins can expand. On the other side if revenues decrease, our operating margins would decrease as well. I did want to say – one interesting thing about our operating margins, the leverage is mostly on our operating expenses. If you look at our gross margin, it’s been 52% for six to eight quarters now. And the reason is as we get leverage and purchase price reductions from our vendors in our cost of sales, we share that with our customers. So the operating expenses are fixed and they are leverageable and they will fluctuate up and down with our revenues.

Okay. I guess longer term if you do build up industrial as a percentage, does that require more expenses as far as servicing all the different end markets?

No, that’s really good – organically a couple of things. First of all, industrial margins are comparable if not higher at least on the gross margin than our semi. One really good thing if we’ve invested in our sales and marketing infrastructure and industrial; that’s with people, that’s with filling out the channel. This is channel management software tools and those costs are in our P&L. So that’s a positive. We’ve made those investments going forward. So organically our industrial margins they should stay very, very healthy.

Okay, great. Thanks for your time.

Thank you. It looks like we have another question from Krish Sankar from Bank of America. Your line is open.

Yes, hi. Thanks for taking my follow up. A question for Tom. With your operating margins running at such high levels and I understand M&A is going to focused on diversifying into industrial rather verticals, is it fair to assume any M&A at these levels is not going to be accretive necessarily for you guys?

On an operating margin, our M&A would be accretive dollar wise though not on a percentage wise. When you look at our targets and when you look at what we use as a threshold generally for an operating margin, we look at something in the mid-teens, like a 15% where we cost there in our core competency, we can grow it to 20%. There are some targets that are 20% above. But overall, Krish, the way to think about it is M&A is accretive earnings, it’s accretive operating margin dollars but it will be lower percentage wise.

Got it. Thank you, Tom, very helpful.

Sure.

That’s all the questions that we have in the queue at this time. So I’d like to turn the call back over to management for closing comments.

Thank you everyone for joining us today. This is an exciting time for AE. We’re excited about the quarter, we’re excited about the future and we are excited about the year and next year. Looking forward to seeing you in various events in the upcoming quarter. Thanks a lot.

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may now disconnect at this time. Everyone, have a great day.