Ladies and gentlemen, thank you for standing by and welcome to the Advance Energy Industries’ Q4 2019 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for this conference call, Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. You may begin.

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy’s fourth quarter 2019 earnings conference call. With me today are Yuval Wasserman, our President and CEO; Paul Oldham, our Executive Vice President and CFO; and Brian Smith, our Director of Investor Relations. If you have not seen our earnings press release, you can find it on our website at ir.advanced-energy.com. There you will also find a slide presentation to follow along our discussion today.Before I begin, I would like to mention that Advanced Energy will be participating at multiple investor conferences in the coming months. As other events occur, we will make additional announcements. Let me remind you that today’s call contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees for future performance. Information concerning these risks and uncertainties is found our our filings with the SEC. All forward-looking statements are based on management’s estimates, projections and assumptions as of today, February 18, 2020 and the company assumes no obligation to update them. Long-term targets, including integration targets and aspirational goals presented today should not be interpreted in any respect as guidance. Today’s call also includes non-GAAP financial measures. An explanation of these measures as well as reconciliations between GAAP and non-GAAP measures, are contained in our press release and slide presentation.During today’s presentation, in addition to our reported financial results, we will provide revenue comparisons on a pro forma basis which includes full historical revenues of the acquisition in prior periods. In addition, we will provide revenue comparison on an organic basis, which excludes the contribution of Artesyn revenue. We believe these data will help investors’ better understanding the performance of our results. Details of Artesyn historical revenues by markets can be found on our website.With that, let me pass the call to our President and CEO, Yuval Wasserman. Yuval?

Thank you, Edwin. Good morning, everyone and thank you for joining us on this call. Before I start, let me touch on the outbreak of coronavirus. We are taking this threat seriously and have assigned an executive led global team to mitigate risks and manage any impact on our employee base and operations. Since our most important priority is the health and safety of our employees, we are taking a prudent approach in restarting our Chinese production facilities in full coordination and compliance with local government. We have opened all our factories. However, with the uncertainty due to disruption in transportation, government imposed limitation of people density in commercial buildings and a slow rate of restarting supply chains after the extended break, our assumption is that our production output would be affected and for that reason, our Q1 revenue guidance will be set below our growing customer demand. As the situation continues to evolve, we are actively collaborating with our suppliers and customers to mitigate the impact on shipments.Now, let me turn to our business. The fourth quarter marked a strong finish to a transformational year for Advanced Energy. Our quarterly revenue and earnings surpassed the top end of our guidance ranges driven by market recovery in the semiconductor and data center computing verticals and incremental revenue growth from multiple product design wins. On a pro forma basis, including a full quarter of Artesyn revenue in prior period, our Q4 total sales grew over 17% sequentially. Our team executed well to meet the increased demand, while at the same time continuing to focus on expanding our design win pipeline with new products and technologies to support future growth. This quarter, we also started shipping products from our new factory in Malaysia following initial customer qualification consistent with our strategy and…

Thank you, Yuval and good morning everyone. Total revenue for the fourth quarter of 2019 was $338 million, up from $175 million in Q3, which only included a partial month of Artesyn. Excluding Artesyn, organic revenue grew 18% sequentially and 3% year-over-year to $159 million. On a pro forma basis, including a full quarter of Artesyn revenue in prior periods, Q4 revenue grew 17% sequentially and 8.5% year-over-year driven by strong growth in semiconductor equipment and data center computing. For the full year 2019, we recognized record revenues of $789 million, reflecting 9.7% growth over 2018. Excluding Artesyn, our 2019 revenues were $569 million, down 21% from 2018 primarily due to the downturn in the semiconductor equipment market in the first three quarters of the year and ongoing macro weakness affecting our industrial products.Before I talk about our sales by markets, I want to note that my forward-looking comments for Q1 reflect our demand outlook, not revenue. I will cover our revenue outlook at the end of my comments given the potential impact on our operations of the evolving situation in China. Semiconductor equipment revenue for Q4 was $125 million, up 30% from last quarter and 16% year-over-year. On a pro forma basis, semi revenues were up 28% sequentially driven by 41% sequential growth in semi product sales. We saw continued growth in OEM demand driven by investment in foundry logic, some recovery in memory and the incremental contribution from our prior design wins. For the year, semi revenues were $403 million, down from $534 million last year.Looking to Q1, we expect demand in semi to grow sequentially in the mid-teens with growth from both foundry logic and memory applications. This outlook would represent year-over-year growth of greater than 45%. Revenue from industrial and medical markets was $97 million, up…

[Operator Instructions] The first question comes from Quinn Bolton with Needham & Company.

Hey, guys. Congratulations on the strong fourth quarter results. Thanks for all the qualitative color around the impact near-term on the coronavirus, but wondering if you might be able to give us some sense of how much you shaved off the March quarter guide due to the outbreak? If I look through your segments, semi cap equipment and data center both being up or demand for both segments being up sequentially makes me think that you could have easily shaved $20 million or $30 million off the March quarter guide, is that the right kind of ballpark to be thinking about?

Quinn, hi, this is Yuval, yes, pretty much. Let me explain a little bit from the coronavirus. We view that as a temporary situation. Obviously it’s evolving daily with high level of uncertainty, but we are highly confident in our team's focus and the strong execution and our nimble and agile operation. We have opened our Chinese factories and actively managed our supply chain and operational risks many of our suppliers in China I have just reopened a factory yesterday February 17 while some have not restarted yet we are implementing different solutions to expedite delivery of materials, to the comment that Paul said earlier and component through alternative channels and transportation means our accelerating the return of direct labor to work and ramping up production capacity in factories outside of China our strategy to have multiple factories strategies around the globe is helping us as we have capacity in Malaysia and Philippines some of our support functions are uninterrupted because people work from home people like demand planning management etcetera working from home so again we drew that as a temporary problem and we start seeing signs of recovery.

Great. And then just a follow-up for Paul the gross margin guidance of 34% to 36% sounds like it does not include some sort of near term effect from the virus you mentioned the expedited fees, can you give us some sense is that impact 100 basis points or any further guidance you can kind of give us just to the near term impact from some of those expedite in another costs you are incurring because of the coronavirus?

Yes I think, obviously, gross margin is amalgamation of a lot of factors, right? And certainly, our semi demand is strong and will benefit the mix a little bit in the next quarter but broadly speaking it was probably a 50 to 100 basis impact from just inefficiencies associated with the corona virus that’s they did to that number.

Great. And then last question for me, Yuval, yesterday The Wall Street Journal published an article saying that U.S. commerce department may be looking to change the foreign direct product rule and require export licenses for semiconductor capital equipment to worldwide fabs I know this is sort of very recent news but have you considered what impact such a change in the foreign direct product rule might have on your business or is it too early to quantify?

Quinn right now, we don’t believe that this will impact us significantly.

Okay great. Thank you.

Our next question comes from Tom Diffely with D.A. Davidson.

Yes good morning. First, Paul a question on the backlog look like it was down by 11% sequentially I never thought that this is the time of the year where you would be ramping up ahead of a nice semi ramp here?

Yes, Tom, one thing you have to remember is our backlog is only a partial reflection of our orders because vast majority of semi product is pulled on a adjusted time basis and so that activity is not reflected in the backlog.

Okay, makes sense. And then I guess you are talking about semi demand that you are seeing right now are you seeing is your demand close to equally what you think the end market demand is or do you actually seen your customers have to build some inventory ahead of their rounds?

Well I would not say we are seeing our customers build inventory although the pull rates in December I think were strong as you saw from our revenue but I think that overall the market is up and we are growing faster than the market for a number of reasons one I think we have good exposure to foundry logic which is driving a lot of the demand right now secondly we have seen incremental benefit from some of our design winds that we have talked about over the last few quarters and third we had a headwind last year related to inventory at our customers that basically also drove Q3 so we are not seeing that headwind anymore which is giving us effectively the benefit of faster growth in the market where last year we saw the other side of that.

Okay. And then also you talked about a 20% contribution from Artesyn that so it is a little bigger than we were expecting. Was there more to it than just the nice ramp on the data center side or the cost reduction what drove the upside there?

Well, it is a combination of things and it is $0.20 is what we have said.

It is $0.20 right.

$0.20 of incremental EPS or accretion, that’s after the finance interest costs, but yes it is we have seen good revenue pickup we have also been able to see the initial benefit of some of the synergies that we have implemented we are at an annualized rate of savings coming out of Q4 of a little over $10 million which we think is directionally right on track to achieve our longer term growth those are coming from the number of actions we are able to take right off the bat around corporate costs some initial structuring restructuring that we did some actions that we took in the sales channel to get some efficiencies so we are seeing the combination of those things leading to the benefits that you see there in the accretion we are excited I think we are off to a good start and we are especially excited about how the organizations are coming together and working together right out of the bat

Telling the other great news about the Artesyn acquisition, we already started generating bookings from the semi wafer fab equipment industry for the Artesyn products and this cross selling opportunity that we are talked about is a potential revenue synergy is coming faster than earlier than we thought so this is really exciting.

Okay, great. And then finally when you look I guess you talked a lot about how the supply chain was impacted by the coronavirus what have you seen on the demand side any disruptions there?

Go ahead.

Yes I think it maybe too early to see that impact but we certainly have seen no change in sort of the demand pattern that we saw coming out of Q4 and into Q1 as Yuval Mentioned we have seen a strong start to the quarter and I think the demand picture continues to be robust.

The demand continues to be strong and robust we do not see any additional demand driven by concern about allocations or shortage we just see healthy demand driven by market needs in semi for example one area data center computing and other area.

Okay thank you for your time.

Sure. Thanks Tom.

Our next question comes from Krish Sankar with Cowen & Company.

Yes, hi. Thanks for taking my question. Yuval, I just wanted to go back to one of the earlier questions on The Wall Street Journal article speculation. You said that you see minimal impact I am curious is that answer more based on you talking to your customers or I am just kind of curious like why you think there is only minimal impact for the sector if that article is true?

This is based on our assessment and knowledge of our customer base where we sell obviously we did not talk to our customers since The Wall Street Journal article was published as we sell worldwide we are manufacturing worldwide we have customers around the globe and right now when it comes the near term we don’t see any significant impact on our business long term we don’t know.

Got it, got it. That’s very helpful, Yuval. And then just a question on your facilities in China you said that it is open but the production output is affected I am kind of curious what is the bottle neck is it really labor getting all the people on board and like trying to ramp up the factory or what is the bottle neck in that supply chain ramp up and typically how long will it take to ramp it up to 100% utilization?

So it is a combination of practically three drivers the first driver was basically immediately after the Chinese new year and the extended length of the holiday by the government is the rate of return of employees back to the companies and back to the factories and it was driven by limitations of transportation vehicles and means of transportation areas in China that were under quarantined by the government and that the rate of return was also controlled by the government locally that wanted to ensure that factories are safe for the employees and the safe the health and wellbeing of our employees is a number one priority and we put together a significant measures and means to ensure that this health of our employees is protected so the rate of return and its ramping we see growth in a number of people that are going back to work across our factories the other area is supply chain as I said earlier some of our suppliers are back to work not full capacities some of them are ramping and there are small suppliers especially closure to areas that are in the epicenter that have not started yet we are working closely with our suppliers we are also working with how this an inventory that is in the pipeline in the channel to ensure that we can get that inventory into our factories. And lastly the third aspect is the ability to move material around in various transportation means and when we talk about expediting fees and investment in other way and means to get material it is exactly that how do we reroute material in channels and transportation means that will ensure that we get the material to the factory, so it's multifaceted.

Got it right. Thanks a lot for the color. Yuval, just one final question very nice to see that Malaysia facility ramp up but with the virus does this delay your China facility consolidation or do you think that’s still for timeline?

No it is totally independent in fact we were in the process of ramping our Malaysia factory and because of this coronavirus situation we are accelerating the ramp of the Malaysia factory obviously we also need to remember that some of the supplies that go into the Malaysia factory come from china so it is basically a very carefully planned executed strategy around how to get material how to get labor and how to ramp we are shipping products from the Malaysia factory to our global customers.

Thank you, Yuval. Thank you.

Our next question comes from Amanda Scarnati with Citi.

Hi good morning. Thanks for taking my question. Going to continue on to the coronavirus, hopefully, this is the last question on it. Could that under shipment of demand be met in the June quarter or is this sort of a longer term trajectory of rebuilding up demand do you have the capacity in your fabs to ramp at a significantly higher rate in the June quarter?

Yes, I think at this point, Amanda the environment continues to evolve it is fairly uncertain how fast things can ramp back up but we think it would probably realistically take a couple of quarters before we would see a full recovery that could be a little longer a little shorter depending on how fast things come back but there is a lot of variables we don’t know at this point.

Okay. And then you mentioned in the telecom and networking that the demand is down in the March quarter you expect another one to two quarters of continued pressure before that business bottoms can you talk about what you are seeing there And sort of what gives you the confidence in potentially the back half of the year that you can start to see some revenue recovery?

Well, I think we are entering potentially to the bottom of the market within a quarter or two and this is mainly driven by multiple factors first of all as that the consents out there is that the market will recover a later this year and we tend to agree with that we saw a delay of investment in infrastructure on 5G there is a lot of combination of government and industry forces acting upon the infrastructure investment in 5G the use of LTE advance for 5G applications push the investments further out there are some government involvement around 5G investments as you heard from the UK in other areas and also the impact of the Huawei situation may also impact the global market a we are well positioned to serve this 5G and telecom market when the market recovers because of our strategic relationships very close relationship with some of the leading companies that made those radio towers and the infrastructure so there is no doubt in our mind that we will see that recovery and when the market recover we expect to benefit from that.

And then just following up on that, can you comment on what your exposure to Huawei is and if there would be an impact if given the [indiscernible] that’s reduced to 10% versus 25%?

Huawei is a small customer of ours, very small volume and we serve this customer through our engineering teams and manufacturing in Asia.

Great, thank you.

Our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking my question. You mentioned that the legacy Artesyn business is more exposed to the coronavirus uncertainty than the legacy AE business why exactly is that?

Well we mentioned already that one of the large factories for Artesyn is in china and so there is exposure there but I would say on balance the supply chain in Artesyn because of the nature of the products is more China based as well. So it is the combination of those two things.

Okay. And balance sheet question, your net leverage very quickly turned negative as it has been obviously for many, many years is that reduction still priority for you to bring down that $339 million of debt?

It is although obviously we have been making amortization payments so that how the debts already down $11 million from five months ago four months ago and when we took that debt out but as we continue to see sort of healthy cash generation that’s our number one priority is debt reduction and this quarter our operating cash flow was about $19 million total cash increased about $9 million but underneath that we had a lot of deal related cash costs we have paid a lot of the acquisition rate of fees and as a part of the transaction we assumed a number of payables from the legacy company of Artesyn and those are all paid down so if we exclude those items underlying cash flow is over $45 million we think that is very encouraging and should give us a lot of leverage going forward by the way I just want to note that our net cash was actually positive in Q4 it was negative in Q3 but in Q4 the combination of the higher cash balance and the payment on the debt did move to positive this quarter.

Okay, I appreciate it.

Yes.

Our next question comes from Patrick Ho with Stifel.

Hi, good morning. It’s Brian actually calling in for Patrick. Thanks for allowing me to ask a couple of questions. But maybe first on the semi cap business just to go back to a line of questioning and just to clarify it sounds like your semi cap shipments in Q1 you are saying that sequentially may be flat to down 10% versus what you think the organic demand is just want to clarify that sort of ballpark. And then also, in light of what's transparent, I'm wondering if you think your customers are going to naturally request to add a may be a buffer stock layer here giving sort of just from a supply chain sort of safety of supply standpoint?

Yes, yes, thanks, Brian. First thing thanks for asking the clarifying question we did not actually say by market how the demand would be impacted other than that Artesyn would be impacted or the embedded power products would be impacted, we think slightly more. Broadly speaking I think the demand pattern will somewhat drive the underlying revenues I think those proportions probably hold and we expect semi to be up which means a relatively less impacted if you look sequentially. The second…

Well, our customers in semi as they pull material when they needed from our just-in-time inventories and our just-in-time inventories have bins with inventory in them, and this inventory acts like a buffer.

Okay. And just the question data center it sounds like in the semi cap business between foundry/logic memory, do you think there is anymore impact near term if it takes may be a quarter or a couple of quarters to sort of catch up there and anyone particularly that might be more impacted?

I don’t think we can answer that question.

Okay, okay fair enough. And data center, is there a way, obviously even on pro forma basis, nice sequential jump there in Q4, is there a way of characterizing what your revenue and your growth in Q4 might have been for data center excluding the share gains, just kind of – just trying to understand what the natural market growth rate might have been?

Hey, Brian, this is Edwin. Just to give you some color on the data center, we were quantified in majority of the growth we got sequential, the 70% sequential that we talk about vast majority of it is due to share gains.

Vast majority is share gains.

Yes. As we said, one, we had a Tier 1 hyperscale customer that ramped. That is a new customer.

So let me give you a little bit more color. The data center hyperscale is obviously an important part of the business. Over the last 18 months to 24 months, the company has put significant effort in getting design into the hyperscalers. We view that the hyperscale part of the data center computing is the fastest growing segment and for that reason, a significant effort was put in gaining share in hyperscale part of the business. So most, if not all of this increase, joint increase, a 70% increase in data center computing business is a result of these recently won design wins that are converted to match production in high volume shipments.

Okay. And obviously, you expect lot of strength in Q1 as well. I know you referenced as being sort of a lumpy business. Is there a way from a baseline perspective or maybe from a client perspective, what you think the TAM there might grow in calendar ‘20, obviously you guys probably are going to grow well ahead of that, but way of kind of baseline there, I don’t know if you want to bifurcate it by sort of hyperscale versus enterprise or cycle?

Yes, I don’t think – I don’t have the answer right now for that, right. And we can get back to you with that.

Okay, no problem.

Right now, we believe we grow faster than the market. And mainly because of those design wins and share gains that allows us to accelerate, we say that hyperscale will grow at about 15% CAGR, but that the TAM will be flattish, right. So we can get back to you.

It sounds like based on sort of the way your supply chain is oriented and where demand is coming from, that doesn’t seem like it’s necessarily impacted from sort of the China effects?

I wouldn’t say that. I think that China coronavirus effect impacted all of our products.

Okay, okay. Thank you. And just to be clear, the China coronavirus effect we think is a temporary effect. It’s affecting our ability to stay out of the factory in the near-term. We don’t see it having a longer term effect on any of these markets at this point and it’s just a matter of how quick things come up and we can get things converted and then how quickly we basically fill that gap between essentially backlog, or demand and the output we are able to achieve in the near-term?

We are very excited – we are very excited with the continuous growth in demand for our products across the markets we serve. We need to go through this short-term situation in China before we recover.

Okay, thank you.

Alright.

Our next question comes from Mehdi Hosseini with SIG.

Yes, thanks for taking my question. Couple of follow-ups. Yuval, it’s been almost 2 months since your Analyst Day, and I am just wondering if you have any additional thoughts on the core semi cap, how do you see the market evolving throughout the year excluding the coronavirus and how is that different than your thoughts back in mid-December when you had your Analyst Day? I have a couple of follow-ups.

Mehdi, I think the general consensus has become more constructive since our Analyst Day. We saw the market becoming more bullish around added capacity, not only in foundry and logic, but also in memory. And for us, obviously, good news because we are quite balanced in the way we served the market both in foundry logic and memories. Without the impact of the coronavirus which we believe is a temporary bump in the road, we would assume that 2020 will be slightly better than we thought originally.

So there is more of a increased diversification in end market demand drivers like it’s not just foundry, now you are beginning to see a pickup in memory, is that correct?

Correct, correct.

Alright. And then just one follow-up…

And by the way, with that, Mehdi, we see some additional investment driven by new technology, advanced technology, new materials, new processes.

Sure. Did you say that – in your prepared remarks, did you say that the semi cap revenue would be up mid-teen in March versus December?

We said that demand will up mid-teens sequentially in the current quarter versus Q4.

But the rate of demand, yes, good catch, Mehdi, demand is up mid-teens. Obviously, our ability to deliver to this demand is temporarily affected by the coronavirus situation in China, but the demand continues to be strong.

Sure, okay. But my question here is let’s say $130 million plus or minus as to how I come up with the March quarter revenue attributable to semiconductor equipment. What I wanted to learn more is how do you see this cycle playing out in the next 2 years? In the past, in the prior cycle, in the 2016 and 2017, you benefited from a multiplier, because of 3D NAND and now as you look forward, the 3D NAND is still there, now you have additional layers for DRAM and you have a foundry. Are we still going to be looking at the past and thinking about the 2x to 3x multiplier factor and how that’s how we should model this for the next 2 years or do you have any other thoughts you can add to it?

So, let me give you a high level kind of a quoting consensus opinions have been maybe talking about what we saw 2, 3 years ago when industry converted 3D NAND. So right now, I think the consensus is that 2020 will be a growth year and 2021 will be a very strong growth year that’s the general consensus right. And we are not market forecasters. So, we basically look at what we hear and register that general information. Now in the years ‘16/17/18 first half, what we saw was the conversion of an industry from planar to 3D memories, especially NAND. That level of multiplication was driven by additional capacity greenfield fabs and also the fact that yields were relatively low. We believe that the industry became more efficient, yields are higher and the additional capacity especially greenfield will not be at the level we saw at ‘16, ‘17 and first half of ‘18. That’s the only commentary I can give you. Again, we are not market forecasters. However, as we have demonstrated, we will still drove faster than the market we serve as we have done in the past.

Sure. Thanks for all the detail. Just quickly switching to Paul, if your initial assessment were to play out and you see that second half uplift, especially as some of the revenue from the first half pushed out to the second half, should we expect the absorption and gross margin recovery would get you into the 40s?

No, I think that would be too aggressive. Certainly, our long-term goal is to get margins up to the 40%, but that’s on a fully synergized basis and with revenue levels that start to approach the $1.4 billion, $1.5 billion range, Mehdi. But certainly as volume picks up, we get efficiency improvement and we are actively working on implementing the synergies over time. So certainly our goal would be to continue to bring that margin up, but that would be too fast to get to that level on the second half. I’d say maybe broadly speaking there will be modest improvement in that direction, but certainly not getting to that level.

Okay. And how should I think about the OpEx, where would it go from $75 million in the midpoint?

Yes, broadly speaking, as revenues pickup, we will see some modest increase in variable cost, but we didn’t make a lot of structural reductions in the downturn. We don’t have to make a lot of structural adds going forward. So I think broadly around this level, with some modest variable cost pickup is probably the right way to think about it.

Great. Thank you guys.

I am not showing any further question at this time. I would like to turn the call back to Yuval for closing remarks.

Thanks everybody for joining us today. We are extremely excited about the integration of Artesyn and the future of the company. We view the coronavirus situation as a temporary bump in a road. We are seeing increased demand for our products from various end-market verticals and we are ready to serve those markets as soon as we can in terms of our operation in China. I am looking forward to seeing many of you during the quarter. Thanks.

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