Ladies and gentlemen, thank you for standing by, and welcome to the Advanced Energy Industries Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Advanced Energy's Third Quarter 2020 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.advancedenergy.com. There, you’ll also find a slide presentation to follow along our discussion today. Before I begin, I would like to mention that AE will be hosting a virtual investor event on Monday, December 14. We welcome all of you to join us at this event. In addition, we will be participating at multiple investor conferences in the coming months. As events occur, we will make the 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 in our filings with the SEC. All forward-looking statements are based on management's estimates, projections and assumptions as of today, November 5, 2020. And the company assumes no obligation to update them. Long-term targets present today, which include our aspirational goals and the integration targets should not be interpreted as guidance. On today's call, our financial results will be present on a non-GAAP financial basis unless otherwise specified. An explanation of our non-GAAP financial measures as well as reconciliations between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our CEO, Yuval Wasserman. Yuval?

Thank you, Edwin. Good morning, everyone, and thank you for joining us on this call. Overall, this was an outstanding quarter for Advanced Energy with record revenues, earnings and operating cash flow. We delivered sequential revenue growth across all of our market verticals, and recorded new quarterly highs in semiconductor, data center computing and service. Good operating leverage and continued execution on our synergy goals, resulted in gross margins approaching 40% and non-GAAP earnings per share, up over 3x from last year, validating our financial model and demonstrating our ability to accelerate earnings growth. Overall, demand for our products continue to be strong driven by ongoing investments in technologies associated with the data economy, great execution by our operations and supply chain teams enabled us to catch up on COVID-related delays and respond to the burst of demand. During the quarter, we continued to ramp our Malaysia factory, which is next to one of our leading customers, as we integrate and optimize our global operational footprint. It provides us with business continuity and resiliency in meeting our customers' demand in a dynamic operating environment. In addition, we continue to execute on our integration plans, delivering synergies and record accretion from our Artesyn acquisition. We expect additional synergies to be realized through 2021, as we execute structural changes in our manufacturing and supply chain. Beyond cost synergies, we have started to secure new cross-selling design wins across both semiconductor and industrial end markets, and we expect those means to drive incremental revenues in 2021. We continue to invest aggressively in R&D, which enable us to win multiple design wins across all markets and to launch 6 new products across different portfolios during the quarter. These new wins and new offerings are expected to generate continued growth for AE going forward. Turning…

Thank you, Yuval, and good morning. Before I begin, please note that all financial measures presented today will be on a non-GAAP basis, unless otherwise stated. Excluded from non-GAAP results are amortization, stock compensation, integration and transition costs, unrealized foreign exchange gains and losses and restructuring items. This quarter, we recorded $5.6 million of acquisition-related costs related to the Artesyn acquisition and transition. We also recorded $3.5 million in noncash, unrealized FX losses related to long-term lease and pension liabilities. A full reconciliation from GAAP to non-GAAP measures can be found in our press release issued earlier today. As Yuval mentioned, this was an exceptional quarter as we delivered record results across a wide range of financial metrics. Strong execution by our team to meet our customer requirements and increased demand for our products enabled revenue and EPS to surpass the high end of our guidance ranges. In addition, we achieved an annualized return on invested capital of over 25%, and our cash balance increased by over $48 million. Perhaps most significantly, our financial performance validates our business model and demonstrates the leverage in our operation as we execute our strategy to accelerate earnings growth. Third quarter revenue was a record $390 million, up 15% from $340 million last quarter and 122% from a year ago. We saw sequentially stronger demand across all our markets and a burst of order activity at the end of the quarter that we were able to deliver to our customers' short lead time requirements. In addition, we were able to ship backlog created during early 2020 due to capacity supply constraints, reflecting roughly half of the upside to our guidance in the quarter. On a pro forma basis, including a full quarter of Artesyn revenue in prior periods, Q3 revenue grew 35% year-over-year. Excluding…

[Operator Instructions] Your first question comes from the line of Scott Graham with Rosenblatt Securities.

So I have a couple. Could you -- you all talk a little bit more about the high-performance computing and calling that a secular driver, this is a ramp of a win -- how -- even if you could just give us some type of parameter for how big that is within data center computing and I guess it's important enough where you listed it on this page. So if you can maybe give us more color on that?

So I think it's a trend right now as we see migration to high-performance computing driven by increased focus on AI, artificial intelligence, machine learning and more focused on edge computing. These applications are requiring significant amount of power, their power hogs. And we are well positioned, and specifically in this area because of our high-efficiency of power conversion, power density and our solution provide a competitive advantage when it comes to the actual total cost of ownership of the asset. Now I cannot comment on the size of the market. I'll ask maybe, Edwin, if you have any information about the size of this market, but it's definitely a trend that will continue to grow, and we are well positioned to benefit from this growth. Edwin?

Yes. So this particular one, we won this design on enterprise OEM who has a high-performance computing platform that they are rolling out, right? But I think the whole idea is that as things move forward, there are more AI or machine learning kind of applications being adopted and you hear from multiple company talk about high-performance computing as an area that will grow, right? And as that grow, as you all suggested, those server and those system typically come with substantially higher power, which then higher power density becomes a more critical primaries as important for this and that's an area that we believe we have advantage. That's why we're winning this a lot.

Got it. That's very helpful. Paul, one question for you. You talked about a sort of a onetime or expected nonrecurring benefit in the third quarter, the gross margin. And you said something about -- I'm sorry, if I’m missing this, that half of your upside in the quarter was due to something, end of quarter shipment or something along those lines. Could you clarify both the gross margin and all of that comment as well?

Yes. Sure, Scott. So on the revenue, obviously, we had an outstanding quarter, even above our guidance range that we gave before. What we said on the call is about half of that upside came from catching up backlog from earlier in the year, that essentially was a result of operational supply constraints related to COVID. So that was better than we thought we could do. So we had a really good quarter, and that's why we wanted to call that out, in particular, the catch-up on that backlog. Now if you look at our backlog numbers, they were still quite strong because we were able to fill some of that in at the very end of the quarter due to the strong demand we saw. The second comment on gross margin, what we said is the sequential improvement from last quarter was largely the result of higher volume. And what it illustrates, though, is that some of the underlying improvements we've made in portfolio, rationalization as well as cost are really shining through. As you saw this quarter on a non-GAAP basis, margins are almost 40%, which is close to our goal. Even though we haven't completed kind of our Phase 2 structural changes for -- around cost of sales and supply chain and some material cost savings that we think we can achieve over the next year or so. So it wasn't really any onetime item in gross margin, it's more the benefit of volume, but we're seeing the actions we're taking underneath that really, really starting to come through, which gives us a lot of confidence about our ability to get to 40% gross margins over the long run as we see good volumes in the business.

One comment about the quarter is our ability to respond very quickly to changes in volume and mix, and that allows us to deliver to customers when they need it and address this burst in demand in Q3.

Yes. One last quick one, if you don't mind. Could you just briefly talk about -- you're saying that the telecom and networking market, you're expecting that to get better. I thought you said late in '21. Is that simply a pushout of your customers of their 5G spending? Is that what that is tied to that comment?

I think we said later in 2021, not late in '21. We basically -- basically talking about data center computing will recover in late in 2021. Telecom networking, we came from a trough, and we see some recovery. Although because of the geopolitical situation and delay in some investments in 5G infrastructure, we see some pushout into next year. However, we are very excited about 5G. And to make sure that people don't misunderstand us, 5G drives growth in all of our verticals, not only in telecom network and networking. Telecom networking at the 5G products we sell in telecom networking go to the base stations and the radio towers. However, 5G in general drives increase in semiconductor devices, which drive increase in the need for semiconductor processing tools. It accelerates the migration to Industrial 4.0, that also increased the need for some of our advanced solutions for medical, for industrial, for automation, et cetera. So we are extremely excited about 5G. And we believe that the world is just the beginning of the adoption of 5G, and that will continue to drive secular growth for us for all of our verticals, not only the power supplies that go into the infrastructure.

Your next question comes from the line of Paretosh Misra with Berenberg.

Great. What is the medical component? How much is that within the industrial and medical business? And how are you looking for growth potential add for the medical part of that business?

Yes. Overall, we said last quarter that our medical is about $75 million, and it's been growing. This is an area we're excited about. If you go back 3 or 4 years ago, we had virtually no presence in this market, and we've been able to grow that both through products we've acquired and organic growth. So it's an area that we see of growth going forward.

And the growth is driven both by, I would say, short-term need, a burst of need for critical care applications like ventilators and also some life science equipment that goes into a gene sequencing, vaccine development and testing. Long term, we expect to see a continuation of the growth coming from the noncritical applications. And we mentioned just a few example, so we became a sole supplier for a blood analyzer and additional applications that go to diagnostic, imaging and also therapeutic applications.

Interesting. And then within the industrial part of that business, are there any specific end markets that you think have been a drag on growth? And any thoughts on when those slower growing or not growing end markets might recover?

So the beauty about the industrial market, the non-medical part, right, the industrial market, it's highly diversified. And that's the exciting thing about it because if you look at every application in the world, they could be lumpy and they could have cycles of investment because these are capital investments. So in this specific market, we see growth coming from a consumer electronic product coating, and these are tribological coating or optical coating. We see increasing need for automation and motion control. And again, very broad. And I -- you should expect to see that product mix, market mix and application mix changes dynamically. But in aggregate, we expect to see this part of our business continues to grow at GDP plus.

Understood. And maybe if I could ask just last quick one for Paul. And just on your balance sheet and capital allocation philosophy, given where you ended up at the end of this quarter. Just any thoughts on how you’re looking to deploy cash in the quarters ahead.

Yes. Clearly, our primary goal in cash deployment is to continue to grow the company. We've stated that, broadly speaking, we'd like to deploy roughly 70% of our capital to smart M&A to continue to build out our strategy or as a pure-play power provider. And the balance we would look at as available to return to shareholders. We've done that historically and continue to invest through an opportunistic share repurchase program. It doesn't mean we're buying every quarter, but we're looking for opportunities that make sense to be in the market. And we will -- we did buy additional shares this quarter, as you saw stock dipped, we’re able to pick up a few shares. I think year-to-date, we've purchased something like $12 million or $13 million of stock through the first 3 quarters of this year. And that will vary by year, but that's our goal is roughly 70-30 split.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the results. Wanted to just come back to the semiconductor business and your comments about growing faster than peers. I think MKS talked about growing its power business over 100%, both in the quarter and I think year-to-date, which sounds perhaps faster than your overall semiconductor business. So wondering if you might be looking at apples and oranges here? Or just could you clarify your comments about your belief you're growing faster than peers? And then I've got a couple of follow-ups.

Sure. Thank you for the question, Quinn. I think you're not looking at apples-to-apples. I think you need to really take a deep dive and look at the definition of power. Now if you look at growth, I'm saying right now, categorically, we are growing faster than MKS. Q3 year-over-year, year-to-date, half -- second half versus first half and year-over-year. And we'll be able to talk to you later, but show you some numbers. So we are growing faster than MKS in every category of growth comparison you look at. I don't know how they define power. The area where we compete with them categorically, we're growing more than they do, and we're gaining market share that drives that growth.

Okay. Paul, second question for you. You talked about catching up on backlog built earlier this year due to COVID supply constraints standard for half of the upside in the third quarter. As you come into the fourth quarter, do you expect to catch up on additional demand? Or do you think with the third quarter upside, you're largely back now and all of that catch-up is behind you?

I think we're largely caught up from things that were delayed due to the supplier constraints and some of our operational challenges, particularly out of the Philippines. And most of that came out of the I&M and telecom side for embedded power type products. So we think we're largely caught up. Having said that, we continue to have a very strong backlog position because we continue to see good demand across our other markets. So we think that, that helps the quarter certainly. But we wouldn't expect to see that catch-up or a big backlog drawdown necessarily as we look forward.

And your next question comes from Mehdi Hosseini with Susquehanna.

Yes. I have a couple of follow-ups. And one as a follow-up to Quinn's question. I think it would be very helpful if you could give us an update on how you're increasing market share or presence in Japan, especially as it relates to semi cap. And I have a few follow-ups.

Well, Mehdi, obviously, we need to be very carefully -- very careful about customer information and our business size and activities of customers’ sites. We are definitely gaining share in Asia, including Japan and the areas that we are gaining share are related to etch and deposition. We see dramatic growth in general in our RF matching technology. And as you know, RF matching is sort of the glue between the power supply and the process. And it's an area that is extremely critical, especially as multiple frequencies are being used to drive advanced processes. We are the leader in technology in RF matching and our RF matches continue to be adopted across the board as an enabler for next-generation technology. And that's the reason, if you go back to our prepared remarks, you can look at the growth rate we exhibit in the RF matching area, which is phenomenal. Another area that we openly talked about is key to our strategy in semi first is remote plasma source technology. And our remote plasma source product line continued to grow significantly, and we expect the business to continue to generate incremental revenue for the future as we continue to gain share, both in Asia and also in other locations around the world. I hope that answered your question, Mehdi.

Absolutely. And I want to go back to some of your targets. You have highlighted consistently your desired goal of exceeding revenue target of $1.5 billion and cash EPS of $6.50. Your Q3 results despite the onetime adjustment to backlog from earlier this year, puts you above that run rate. And as you look into the future -- and I understand you're going to provide us an update on December 14. But as you look into the future, do you think that you're going to continue to exceed your targets organically? Or is this going to be a mix of organic growth and selective and opportunistic acquisition?

Yes. Those long-term targets that we talked about, Mehdi, do not include acquisitions. So that's our organic growth targets. To the degree we did additional acquisitions, we would see that as incremental to achieving those numbers. So obviously, we're pleased with the progress we've made today. I think we're ahead of schedule. And at the same time, there's more to do. Certainly, around -- I'll say, the structural part of gross margin improvement. And we've always talked about Phase 2. It's well underway, and we expect to make really good progress on over the next year, which will continue to supplement our efforts to improve gross margin. But I think the encouraging thing or exciting thing for us is that with these higher volumes and the changes we've already made, you can see kind of a glimpse of the future. I mean we're approaching those numbers before we've completed all the opportunities to drive improvements in the business.

Right, Mehdi, to maybe reemphasize 2 points here. Q3 is kind of a peak into the future, even before we completed all these synergies that will be realized in the integration of Artesyn and future synergies that will come after that. In addition to that, to the point that Paul made, we remain acquisitive. And the plan that we basically described to you when we put together our aspirational goals does not include acquisitions.

I just want to highlight that. Now just one more -- one quick question regarding the momentum. You talked about how you see the different business units trending. But do you -- you can answer qualitatively or quantitatively, was your book-to-bill above 1.0 exiting Q3?

Yes. It's a tough question to answer because, as you know, our book-to-bill, we don't really have a book since a lot of our products, especially in semi, and to some degree, even the embedded power they're pulled. There's no order for them. They just get pulled from a jet bin or from a hub. But on balance, I would say, we feel our -- outside of maybe the catch-up in backlog. Certainly, our book-to-bill is at least 1.0 or higher.

And again, Mehdi...

Qualitative -- qualitatively.

Right. And Mehdi, as you know, significant portion of our business is based on long-term purchasing agreements and not purchase orders that are being placed every week or every day. So these are long term, and it's a demand flow of technology, our customers pull our products from hubs when they need them.

Congrats.

Your next question is from Tom Diffely with D.A. Davidson.

Yuval, I was hoping you could talk a little bit more about the cross-selling opportunities. It sounds like you've had a little success now. And if you could highlight where that's coming from and what's the opportunity is, that would be great.

Thank you, Tom. Yes, cross-selling, as we mentioned earlier in previous quarters, started to realize itself faster than we predicted. And we see an increase in number of applications that we can serve with our embedded power products, and we have launched a unique product called iHP at SEMICON West that goes into multiple platforms in the semi industry and in this case, Tom, it's [ auxiliary ] power, it's not process power. Now it doesn't mean that it's not important. These power supplies, if we do not operate, then the whole machine doesn't move. So these are really important power supplies with unique capabilities that serve the global platform, not only inside the fab, but also outside of the fab in the back end of the process, testing and packaging. So this is an area that we continue to drive in semi, but we also see additional growth coming to industrial applications as we start moving products from different product lines that basically belong to either native AE or native Artesyn. We're now cross-selling them to different markets. So it's an area of significant potential incremental growth and drives a lot of excitement. What we bring to the table in some of these applications, our global footprint, our global manufacturing capabilities and support infrastructure around the world with our high-density and high-efficiency of conversion plays well into those who start looking into efficiency of power and performance locally around the world. So we're very excited about that. And we view that as one of the revenue synergies associated with the recent acquisition.

Okay. Are these situations where you have to catch the product release cycle, so it takes a few years before this gets fully integrated into the opportunity?

Well, in some of these cases, I would say, yes, it's similar design cycle. However, we had a few cases when we were asked to step in and help a customer to displace an incumbent that could not perform. An incumbent that could not perform either because of COVID-19 or could not perform because of issues related to their operational supply chain, at that point, our resiliency allows us to very quickly derivatize products to our customers' needs and will come back with a plug-and-play solution to help our customers.

Great. Okay. And then as a follow-up, Paul, I'm wondering on the capacity side of your business, with a couple of segments reaching record levels, do you have the capacity to already handle, call it, a double-digit growth in semi cap next year or adding a couple of new hyperscale customers? Or would you have to add capacity?

No. It's a good question, Tom. We believe we do have capacity to things that have constrained us this year have been, I'll say, COVID-related restraints, just the ability to get people into the factories as well as supplier constraints. And that's been the challenge. We certainly have physical capacity to continue to grow both in semi and data center across the board.

Yes. It's a great question, Tom. We expect our industry to continue to have -- to continue to grow, but we may see quarter-to-quarter variations driven by our customers' demand profile. So we have designed a plan for managing bursts. And we have the capacity, we have the test equipment, we have the fixed cost in place already and variable costs will vary with the volume. So we expect, not only to be able to address the capacity increase, but also to do it in a very efficient way financially.

Your next question is from Pavel Molchanov with Raymond James.

Obviously, the election results are still a little fluid by let's assume for the sake of argument that there will be a change in administration. And in that context, a different approach to trade with China specifically. What impact, if any, would the ending of the trade war have on your business?

It's a good question, Pavel. Obviously, that's -- it's a difficult one to answer since there's a lot of dynamics. But look, broadly, I think the effects of the trade and tariff war so far have had not a lot of effect on our business directly. Because we have a global footprint, we have global customers, we haven't seen a big impact. Speculatively, with a change in trade policies, improved overall economic growth and trade in that regard. And I think that's probably good broadly for economies in general and for our industry probably as well.

Yes. Our global footprint, Pavel, allows us to deliver to our customers globally and manufacture close to where our customers are. So in that sense, we haven't seen dramatic impact thus far on our business with restrictions. And for that reason, we expect to see -- unless there is an increase in geopolitical landscape that will increase GDP across the board, which will benefit us, we don't expect to see dramatic changes.

Understood. Let me turn to the service revenue. In a certain sense, you're kind of a victim of your own success. You have so much product sales now that service as a slice of the revenue mix is now less than 10%. I know you've talked in the past about kind of building up your recurring revenue stream. And in that context, is that something that would be relevant to vis-à-vis M&A, acquiring any kinds of service or perhaps software businesses if that's relevant to create or...

Yes. So Pavel, let me make a comment and maybe clarify something for you relative to the comment you made about our declining service as a percent of total revenue. Significant portion of our service revenue comes from our process power business from what we call the advanced power or native AE, if you may. And the reason for that these are extremely sophisticated and extremely expensive products. And when they need treatment or repair or calibration, normally, they're being shipped back to us to our labs around the world, and we take care of them and ship them back to our customers because the value of the asset is so high. In the embedded power business that came through the acquisition, many of these power supplies are not being repaired when they fail, they're being replaced. So it doesn't generate service revenue, it generates product revenue. And it's just a matter of category. Our native service business continues to grow with our installed base, and we expect the business to continue to grow, and we accelerate the growth of this business by offering service products like upgrades, retrofits, refurbishments, et cetera. So that will continue to grow, but the decline in percentage of sales total revenue is a result of the product mix. Now going to the other area that you asked about, software is becoming an important product for us as we launched our PowerInsight offering. We're making an investment and progress in providing software products to our customers that are adjacent to our core products and provide our customers with unique capabilities like big data analytics, predictive maintenance and process diagnostics. That will continue, and our aim is to continue to grow this business and to offer that, these software products to the market first in semi, but later in industrial and telecom networking as well.

And your next question is from Krish Sankar with Cowen and Company.

I had 2 of them. First one, Yuval, when I look at your semi cap revenues or shipments compared with your peers and contrast it to your customers like Lam, it clearly looks like your growth rate is much higher than theirs. And I understand that your customers are also building some buffer inventory because of COVID, but do you worry that at some point next year, this should normalize and your semi cap growth rate could slow down, especially as your shipments catch up with your customers?

Do you want to answer that, Paul?

So look at -- we anticipate -- I'm trying to be careful not to predict the market for you. I'm not trying to be a market analyst. But we are prepared and have the capability to manage and respond to changes in volume and mix. And we believe that we are going to see over the long range of the industry growth. We're not going to have every quarter up into the right in the industry. We're prepared for that. Now the other thing that I believe that happened, especially in Q3, we had a burst of demand. It was really a demand to deliver faster and quicker. And we have the capacity, we have the operation -- operational excellence to be able to respond to this demand. Now I'm sure that somewhere in your question, you're asking about inventory building in the industry. And I can tell you that there is some of that inventory building in the industry that some of it was driven by the -- I would say, the trade war and the restrictions of shipments. But it's not significant to the point that it will impact us dramatically going forward.

Got it. Yuval, that's very helpful. And then just as a follow-up on the data center side of the business, you talked a lot about the hyperscale segment and your traction there. I'm kind of curious to see on the other part of the data center, which is the enterprise spending, how do you see that business trending looks like it budgets are down this year? And how do you expect enterprise to trend into next year?

So let me address the hyperscale first. We are -- we believe that we are in the third inning of our journey in basically designing our products into the top hyperscalers, right? And if you look, based on the information we have shared with you earlier over the last 3 quarters, we have recently got set at the ramp of our product shipments into a third hyperscaler. At the same time, we're making great progress in designing our products into additional hyperscalers. Now if you look at right now where we are in the journey, we're still highly concentrated in just a few hyperscalers. Now we believe that in the short term, we're going to see digestion in the hyperscale market as some of the hyperscalers basically use the inventory that they acquired. And as we look at the market, and I think in our prepared remarks, we said we expect to see resumption of growth coming in 2021. We expect when the market recovers to do better than the market because we continue to gain market share. And we continue to gain market share as a fast follower because of our unique product offering with very competitive energy conversion efficiency and power density. On the enterprise area, right now, we see IT spending is still slow, but high-performance computing will become a driver for the enterprise computing space, and that's why we highlighted this area. We are excited about it because we see more investment in the high-performance computing. New CPUs from Intel and AMD, we believe, will also be a catalyst to a cycle of investment in 2021, and we're looking forward to participate in this recovery.

And your final question comes from Weston Twigg with KeyBanc Capital Markets.

I just wanted to follow-up on the burst of order activity that you mentioned at the end of the quarter and just mentioned in the last comment. Why doesn't this burst in demand carry through to Q4 guidance? In other words, why is Q4 were down if order activities picking up -- was picking up at the end of Q3? I'm just kind of wondering if you add some color there, like which kinds of customers we're doing it. Why it seems sort of temporary?

Yes. It's a good question, Wes. So to clarify, when we look at that surge of orders we saw, we think that was largely prepositioning of inventory to kind of get ahead of seasonal shipment patterns and some of the geopolitical, near-term geopolitical items that Yuval just talked about by some customers, not all, but by few. Overall, we -- despite that, we expect semi to still stay strong. That's what we said in our [ comments ] in Q4. So that's not necessarily what's driving lower guidance. We also said that we don't expect this kind of catch-up from backlog that we saw earlier in the year to repeat in Q4. And that helped Q3 quite a bit. And then secondly, we also said the data center is going to be lower based on customer-specific and industry digestion. So those are the primary drivers. Obviously, there's risks around COVID and other environmental things that continue on. We've largely managed those. But the 2 big items that lead to lower guidance is just we don't expect that backlog catch up to repeat. And we'll see lower impact, lower on data center. That's the digestion in the data center market that's behind a lot of that.

Okay. That helps. And then the other follow-up question I have is just gross margin. The guidance is quite good, 38% to 39%. But you talked about growth in industrial, medical, telecom over the next few years. And I'm just wondering if the semi -- part of the semi demand growth this year was inventory restocking and you see the other segments grow nicely next year. Do you have a gross margin headwind in 2021 that might drive it below that 38%, 39% range? Or could we -- could you see that maybe staying in that range or getting better through the year next year?

Yes. Obviously, mix can have some impact. But look, if you look at this year, semi is up, but so as our embedded power products are up and our gross margins are up in both areas. The impacts that we're making from a synergy perspective and consolidation perspective are having -- they're having the desired effect. And as we look into next year, we'll see some more improvement. So on balance, I'd say the answer to your question is no. We think we can continue to drive gross margins. But there could certainly be some mix impact if you saw big swings in the relative 2 markets.

So just to clarify, you think gross margin could trend up through the year, generally speaking, but with some mix variation?

Yes. Generally speaking, yes.

I would now like to turn the call over to Yuval Wasserman for closing remarks.

So thanks, everybody, for joining us today. Obviously, we're extremely excited with the progress the company is making. We're extremely excited about our future projections and the future of this company. Both -- we have 4 areas of excitement, semi, data center, medical and 5G. And we expect those to drive continuous growth for the future -- for the company in the future. We're gaining share, and we are continuing to expand our presence, invest in new products that allow us to accelerate our penetration to new applications and markets. I'm looking forward to seeing many of you in December when we will provide you a deeper dive analysis of the growth trajectories, the applications, targets we serve and update on our aspirational goals. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.