Good day, ladies and gentlemen, and thank you for joining us for this Advanced Energy first quarter 2022 earnings conference call. As a reminder, all phone participants are in a listen-only mode, but later you will have the opportunity to ask questions during our question and answer session. Also, please be aware that today's meeting is being recorded. To get us started with opening remarks and introductions, I am pleased to turn the floor over to Senior Vice President of Strategic Marketing and Investor Relations, Mr. Edwin Mok.
Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's first quarter 2022 earnings conference call. With me today are Steve Kelley, our President and CEO, and Paul Oldham, our Executive Vice President and CFO. 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 the earnings slide presentation. Before I begin, I'd like to mention that we'll be participating at several investor conferences in the coming months. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, May 4, 2022, and the company assumes no obligation to update them.
Medium-term targets and long-term aspirational goals presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excluded from non-GAAP results are stock compensation, amortization, acquisition-related costs, restructuring expenses, and unrealized foreign exchange gains or losses. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. With that, let me pass the call to our President and CEO, Steve Kelley.
Thank you, Edwin. Good afternoon, everyone, and thanks for joining the call. First quarter revenue and earnings per share exceeded guidance, largely due to good manufacturing execution and our ability to secure additional key components. Our shipments into the semiconductor market were particularly strong. Demand is robust across all of our target markets, and our order book is at an all-time high. To mitigate the impact of a dynamic supply environment, we will continue to maintain full staffing levels at all of our factories so that we can react quickly when scarce components become available. We will also continue to purchase components on the open market at a premium when we can't find those components through normal channels. Finally, we will continue to address intractable supply issues through alternative sourcing and redesigns.
This aggressive approach to staffing, procurement, and component qualification is paying off in the form of higher shipments to our customers over the last six months. There are significant incremental costs associated with our mitigation efforts, but we think our approach makes sense for Advanced Energy and for our customers. I would like to thank our customers for partnering with us to absorb some of those incremental costs. Although we spend a lot of time talking about parts shortages, let me assure you that our primary focus continues to be the development of new technologies and products which provide value to our customers. These technologies and products are critical to our future revenue growth and financial performance. In the first quarter, we launched differentiated products into multiple markets, grew our opportunity funnel, and won designs in many proprietary applications.
In addition, we recently completed the acquisition of SL Power Electronics, expanding our product portfolio and broadening our customer base in the medical and industrial markets. Now I'll provide more color on the operating environment. In the first quarter, we overcame a number of COVID-related manufacturing challenges, including an Omicron wave in Malaysia and a regional shutdown in Shenzhen. The operations team's quick response to the changing environment allowed us to exceed our quarterly production goal despite the COVID headwinds. To mitigate supply issues, we continue to qualify alternative ICs and where necessary, redesign entire circuit boards. Customers are partnering with us in these efforts, and we are grateful for their support. I would also like to note that most of our suppliers are keeping up with our demand despite the challenging supply environment, and their performance is much appreciated.
Now I'll provide further color for each of our target markets. In the first quarter, revenue from semiconductor customers exceeded $200 million, a new milestone for the company. We expect sales into the semiconductor market to grow sequentially in the second quarter and to continue growing in the second half of the year. Given that outlook, we are confident that AE can grow semiconductor sales faster than the overall wafer fab equipment market in 2022. We are making good progress developing technologies and products for applications such as dielectric etch, remote plasma source, and panel-level packaging. These efforts represent upside opportunity for Advanced Energy and will help drive long-term revenue and market share growth for the company. In the industrial medical market, first quarter revenue grew year-over-year. Demand is strong, and our order book increased in the first quarter.
We secured a number of important industrial and medical design slots in the first quarter, with notable wins in electrosurgery, life science, test and measurement, and vehicle charging applications. During the first quarter, we launched the LCM 4000, a high efficiency, high density power delivery system, particularly well-suited for indoor farming and large-scale commercial lighting applications. This highly differentiated solution will enable our customers to reduce both installation costs and operating costs. Keen customer interest in the LCM 4000 has already resulted in several large orders. Now I'd like to touch on our recent acquisition of SL Power, which we believe makes Advanced Energy a top-tier player in the medical power market. We like the medical market because it offers steady secular growth, long product life cycles, and sticky proprietary designs. Medical customers demand highly reliable solutions built on certified lines with custom features.
SL Power is a well-known supplier of customized power solutions for leading medical device and equipment makers. Roughly 75% of their revenue is derived from sole source products. Its portfolio of low power medical products dovetails nicely with Advanced Energy's high-power solutions. With almost no product overlap, we see a lot of opportunity for cross-selling. Now concluding the market commentary, our revenues in the data center computing, telecom, and networking markets were up year-over-year. We see continued strong demand in all of these markets. In summary, as demonstrated over the last six months, we are gaining momentum as a company. Our operating tempo is good, our new products are gaining traction, and our team is energized. With a strong focus on innovation, new product development, and customer satisfaction, Advanced Energy is well positioned to deliver sustained, profitable growth in the coming years.
Paul will now review our financial results and provide detailed guidance.
Thank you, Steve, and good afternoon, everyone. We delivered first quarter revenue and EPS above the high end of our guidance ranges. The results reflect good execution, our ability to secure additional key components, increased factory output, and partial recovery of material cost premiums. Demand continues to be strong, and our backlog grew another 9% to a little over $1 billion. However, the supply chain continues to pace our revenue and earnings performance. As a result, we will continue to plan prudently, but we remain optimistic that we are on track to deliver our annualized earnings target of over $6 per share as we exit the fiscal year. Now let me go over our financial results. First quarter revenue of $397 million grew 13% year-over-year and was up slightly from our fourth quarter.
Revenue from the semiconductor market was a record $203 million, growing 12% from last year and at 13% sequentially. Strong demand and our ability to recover after significant COVID impacts in Malaysia and Shenzhen allowed us to deliver upside to our initial target. Looking forward, we anticipate semiconductor revenue to grow sequentially in the second quarter and in the second half of the year. In addition, we are investing in further capacity and production flexibility. This should enable our throughput and capacity in Malaysia to continue to increase every quarter. We have extended our Shenzhen plant closure to the end of the calendar year. Overall, we expect to significantly increase our semiconductor capacity over the next few quarters, which should allow us to meet our customers' long-term demand as the supply chain improves.
For the first quarter, demand in our other markets was also strong and overall backlog increased. However, revenue was paced by supply of critical components as expected. Sales into the industrial and medical market were $83 million, up 6% from a year ago, but down 16% from our record Q4. Data center computing revenue grew 29% year-over-year to $76 million, but declined 5% sequentially. Telecom and networking revenue was $35 million, up 6% from last year, but down 9% from the fourth quarter. First quarter gross margin was 36.6%, up 110 basis points from last quarter on slightly better mix and higher factory output. Compared to last year, gross margins declined 310 basis points, primarily due to higher material costs and factory inefficiency in the current environment.
Premium recoveries, which reflect costs that we've been able to pass on to our customers, but at zero margin alone accounted for 180 basis points impact to gross margin. We expect the higher material costs and related premium recoveries will continue to negatively impact our results in the second quarter. However, we believe that these costs will gradually come down in the second half of the year based on our mitigating actions and some normalization of the supply chain. Operating expenses were $87.6 million, up approximately 2% from last quarter. The sequential increase was due to investments in R&D, partially offset by lower SG&A expense. Operating margin for the quarter was 14.5%. Depreciation for the quarter was $8.4 million, and our adjusted EBITDA was $66 million, up from $63 million last quarter.
Non-GAAP other expense was $2.1 million, including $1.3 million of interest expense and $500,000 of foreign exchange losses. We continue to expect non-GAAP other expense to be in the $2 million range going forward. Our non-GAAP tax rate was 16%, slightly above our target of 15%. The increase was due to a change in U.S. tax rules effective at the beginning of the year, partially offset by a favorable tax credit. Looking forward, we now expect our GAAP and non-GAAP tax rate to be approximately 19%. Compared to our prior target, this will impact our quarterly earnings by approximately $0.05 per share. Earnings for the quarter were $1.24 per share. This compares to fourth quarter EPS of $1.36, which included a large year-end discrete tax benefit.
Excluding this benefit, last quarter earnings would have been $1.21 per share. Turning now to the balance sheet. We ended the fourth quarter with total cash, including marketable securities, of $524 million and a net cash of $136 million. Cash flow from continuing operations was $10 million. The lower operating cash flow was due to higher net working capital, which increased to 120 days. Inventory on a dollar basis increased 7% sequentially, and turns were 2.8 times. We continue to expect some upward pressure on inventory in the near term as we prioritize meeting customer demand while pursuing shortages of critical parts. However, inventory turns should normalize as the supply chain improves and shipments increase. Days payable declined slightly to 65 days, and DSO increased to 56 days, largely due to timing.
During the first quarter, we invested $13.1 million into CapEx, made debt principal payments to $5 million, and paid $3.8 million in dividends. In addition, we repurchased $6.6 million of common stock at $80 per share as part of our opportunistic share repurchase program. Before I talk about guidance, I want to provide some financial details on the SL Power acquisition. As we announced last week, we completed the acquisition of SL Power Electronics for $145 million on a cash-free, debt-free basis using the cash we have on our balance sheet. SL Power adds approximately $65 million of pro forma revenue on an annualized basis. It is a profitable business with operating margins in the mid-teens, and we expect to realize approximately $4 million of cost synergies once we fully integrate the operations.
With a highly complementary product portfolio and customers, we believe there are meaningful cross-selling synergies which will accelerate our growth in the medical and industrial markets. Now let me turn to guidance. Our second quarter results will continue to be paced by availability of critical parts, including additional risk from the ongoing COVID lockdowns in China. As a result, we expect Q2 revenue to be approximately $395 million ± $25 million. Our Q2 guidance assumes semiconductor revenue will continue to grow sequentially, and it includes a partial quarter of revenue contribution from SL Power. As we guided previously, we expect Q2 gross margin to be approximately flat to Q1 with similar mix and material cost premiums.
We expect operating expenses to be in the $93-$95 million range on annual salary increases, continued R&D investment, and the addition of SL Power, which adds $3-$4 million to our OpEx for the quarter. Including the higher tax rate of approximately 19%, we expect Q2 non-GAAP earnings per share to be $1.05 ± $0.30. Before I open it up for questions, let me make some additional comments beyond the current quarter. As I mentioned, the operating and supply chain environments remain challenging, and our revenue and financial results are being paced by supply of critical components. However, we are executing well and are making progress in our supply mitigation efforts. Demand and our backlog position are strong. We are investing in further capacity and flexibility to increase output as the supply chain improves.
As a result, we continue to believe that we are on track to deliver annualized EPS of greater than $6 per share by Q4, with higher earnings potential in 2023. With that, let's take your questions. Operator?
Gentlemen, thank you. To our audience today, if you would like to ask a question at this time, simply press Star and One on your telephone keypad. Pressing Star and One will place your line into a queue. A friendly reminder that if you're joining us on a speakerphone today, please return to your handset prior to pressing Star and One to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is Star and One if you would like to ask a question. We'll hear first from Quinn Bolton at Needham & Company.
Hey, guys. Congratulations on the nice results. March was the second quarter where you guys were nicely above guidance on your ability to get component supply. I'm wondering if you could just, you know, give us your updated thoughts on component availability. Are things starting to loosen up or have some of your efforts to go out and secure components on the open market really been the source of upside in the near term? Just kind of, you know, thinking about when do you think component availability starts to get more predictable?
Yeah, Quinn, this is Steve. Good question. You know, I think it's a daily battle, essentially. We get upsides, we get downsides literally every day from our critical IC suppliers. We've been fighting this battle for more than a year, so I think we're getting a bit better at it. You're seeing some of the results of our efforts, as we deal with various channels and brokers. You know, I think that's part of it. The other part is we've been working pretty hard on alternative qualifications as well as board redesigns to get around some of the more intractable supply issues. Our customers have been working very closely with us to qualify those solutions quickly. That's also played a part in our success the last two quarters.
We see that these alternative solutions will play a bigger role moving forward in 2022. That's why we're optimistic about the second half.
My second question, really for Paul, and it sounds like you're reiterating your guidance for $6 of annualized EPS. I think in past quarters, you know, that was sort of on a revenue run rate of something a little bit north of $400 million. I guess my question is, you know, your backlog's up now to over $1 billion. It certainly seems like if you can get component supply, that the natural run rate of revenue would be well above that $400 million level. I won't ask you to say when that might happen, but am I right to think that, you know, when you're no longer paced by component issues, the revenue could be nicely ahead of $400 million on a quarterly basis for several quarters?
Yeah, I think that's exactly right, Quinn, and it really comes down to how available the materials are and also what we have to pay for them. You know, we have a little higher revenues now, but part of that is these premium recoveries where we have more revenue, but it's essentially at a pass-through cost. Over time, I'd expect that would decrease, the actual product revenue will increase, and that's where you get some of the lift in gross margin as sales improve as well. You're exactly right. It'll be paced by the availability of parts, and we're doing everything inside the company to put ourselves in a position to get as many parts as we can, as well as be prepared as those parts become available to deliver quickly to our customers.
Got it. Thank you.
Thank you for your question, sir. Next, we'll hear from Mehdi Hosseini at SIG.
Yes, thanks for taking my question. When I look at your reported March revenue, and even looking forward to include or exclude the impact of SL Power, you were still able to have north of $20 million of revenue. I'm just curious, how should I think about that upside driven by your ability to procure components, you know, in the open market versus other factors? Maybe you can help also discuss those other factors, and I have a follow-up.
Yeah, Mehdi, let me just make a comment there. I think there are two main factors that helped us in Q1. The first was indeed our ability to source more components and to put some workarounds into play. The second was our ability to react quickly to the COVID slowdown in Malaysia and the COVID shutdown in Shenzhen. The factories recovered very quickly and actually exited the quarter at a very high operating tempo. The combination of good execution factories and improved procurement of parts really allowed us to hit the number in Q1.
Yes. I appreciate the execution, operational execution, but what is interesting is that it seems like the components availability is there if you're willing to pay a premium, especially if you are going in the open market.
Yeah. Yeah, I think that's true at some level. You know, there's a lot of components that we go after that we don't actually get. It does come down to both, you know, what's available, and as Steve said, I think we've gotten, you know, pretty adept at trying to get what's out there. It really is the limiting factor. Of course, that's very hard to predict, because the shortages are also dynamic. We think you're covered in some cases, and then there's a big commit or something, and you're having to find parts quickly. It continues to be a dynamic environment. I think again that we're able to do better this quarter in getting parts in our factories. We're then able to quickly turn those into product despite the COVID headwind.
Sure. Okay. As my follow-up, now that you're on track to hit north of $400 million in quarterly revenue, and exit the year at annualized earnings of $6, and with more than $10 of net cash per share, why not become aggressive with capital return?
You know, last year we did buy quite a lot of stock back. You'll see we did buy some stock back this last quarter, and our opportunistic share repurchase plan continues to be one of the tools that we have. As every quarter we'll assess, you know, on a variety of factors to determine how aggressive, you know, we should be with that repurchase program.
Got it. Thank you.
Our next question today comes from Steve Barger at KeyBanc Capital Markets.
Hey, thanks. I just wanna make sure I understand the guidance. The midpoint of the revenue guide puts you back at record levels like Q4 and Q1. In those quarters, non-GAAP EPS averaged about $1.30 per quarter. You're guiding to $1.05 at the midpoint. I hear you on tax rate, that could be a nickel, but what are the other factors that'll drive operating margin lower sequentially on higher revenue?
Yeah, I think there's a couple of factors, Steve. The first is that in that roughly flat revenue or slightly higher does include a partial quarter of SL Power. That's revenue that helps us in Q2, but as you know, it comes with a full cost structure. It's not leveraged revenue, if you will. You know, if you exclude that, our you know product revenue is actually we're projecting it a little bit lower in Q2 than we got in Q1. I think that's the biggest thing. You're just getting a little bit of headline benefit of the acquisition. Now over time, as our you know organic revenues you know increase because there's more parts, then of course we'd expect that fall through to occur. That's the biggest factor.
Got it. Okay. You know, order rates for specialty industrial equipment were strong through 1 Q, just, you know, broadly speaking. All the commentary from the companies that have reported suggested trends remain strong in April and really no cracks in demand. Understanding that we're gonna layer in SL Power into industrial and medical, just how are you thinking about organic growth in that segment for 2 Q, you know, the year, if you could?
Yes, Steve. The organic growth in INM is quite impressive. The only thing holding us back right now are critical parts. I think some of the shortages we have in INM are more acute than what we see in semiconductors. There's been a real focus on trying to procure parts for the industrial medical business. You know, we're very sensitized to it, but there's a lot of pent-up revenue and profit in our current backlog for the industrial medical markets.
I guess if you're constrained on the supply side, can you talk about what the order rates were year- over- year in INM?
I can say that our backlog went up in the first quarter, so we continue to receive orders in excess of what we could ship.
Okay, thanks.
Our next question today comes from the line of Paretosh Misra with Berenberg. I do hope I said your name correctly. Please go ahead. Your line is open.
Thank you. Yeah, that was perfect. Can you talk about the mix in your backlog a bit? Is the mix similar to your revenue mix or it's heavier on your semiconductor business?
Yeah. In general, I'd say it's a very healthy mix. Broadly speaking, I'd say it's more healthy than our average revenue mix. Broadly, I'd say over 80% is either semiconductor or industrial medical products.
Got it. How should we think about the output at your Shenzhen facility between now and the end of the year, given your current plans?
Just as a reminder, we decided to keep open the Shenzhen plant through the end of this year. The reason we did that is 'cause we need the capacity. I could say that today, the Shenzhen plant is doing an excellent job with output. In fact, it's the highest output we've seen in many quarters. We expect that they're gonna be a solid contributor over the course of 2022. At the same time, we're bringing up our production in Malaysia. You know, we're setting new output records every month at our Penang facility, and we're getting more efficient and increasing output on a regular basis. We think we're in good shape on the semiconductor production side.
Got it. Thanks, guys.
Very quickly, a reminder to our phone audience that it is star and one if you would like to ask a question today. We'll hear next from the line of Krish Sankar at Cowen and Company.
Yeah. Hi, thanks for taking my question. I had a couple of them actually. Paul, did you mention in your guidance of $395 million how much is SL Power contributing?
We didn't mention it specifically, but it's about $65 million-$66 million annualized if you look at, you know, last year's results. We, you know, closed the transaction the last week of April. You can kind of roughly do the math to get an estimate of the contribution.
Got it. All right. On your June guidance, you know, you clearly said that semi should grow sequentially. If I layer in the fact that, you know, SL will help INM, is it fair to assume that semi and INM grow sequentially while telecom and data center is down in June?
Yeah. Let me comment here, Krish. You know, our guide is substantially better than what we guided in Q1, but it's less than what we actually delivered in Q1. Really what's going on is there are a couple key uncertainties that we deal with every quarter. One are the critical IC decommits and upsides, so it's very difficult to predict. The second one we have that we're dealing with this quarter are the COVID lockdowns in China. It's really hard to precisely quantify the impact of those lockdowns. We know they're impacting various parts of our supply chain. They're not impacting our factories, but they're impacting our suppliers. We did take a bit of a cautious approach to our Q2 guidance.
Got it. Super helpful, Steve. Then just a final question. You know, Steve, you mentioned in the past, I think it's been almost for the good part of the last six months or so about, you know, dealing with, you know, paying a premium or a massive premium with the, you know, third-party brokers. I'm just kinda curious, I mean, looking over the last month or two months or three months, would you say that the amount you paid to those brokers has that been going up or has it been flat, or do you think it's actually rolling over from what you paid like, you know, a few months ago?
You know, it's a good question. As Steve said, it's sort of a day-to-day battle, so I think we're a little cautious about, you know, trying to divine trends. In general, I'd say there's indications that the incoming rate of those is getting better. Maybe not what's coming in the door, but what we see out there is maybe trending better. That's part of what, you know, leads us to conclude that we're on track to what we said earlier, that towards the latter part of the year, you know, we should see these things coming down. You know, I don't wanna get ahead of myself too much, just because it's a dynamic environment. Steve already commented on the China COVID lockdowns and the impact on the supply chain.
You know, but you know, we're you know cautiously optimistic perhaps that those are starting to improve.
maybe if you could squeeze one last in, Paul, you know. You know, based on what you just said and your comments that Q4 exit runway for EPS should be over 6+ annualized. In the past you said that gross margin should inflect in the second half. Should we still assume it, or do you think gross margin inflection is more a Q4 story rather than a Q3?
Yeah, it's a good question. I think, you know, as we thought about that, gross margins in total will be up in the second half, but you should really think of it as a more of a Q4 than a Q3. You know, maybe some modest improvement in Q3 and then more in Q4. Look, it's. You're hitting on exactly the key issue. To the degree that these premiums can subside, that's gonna help us. The question is, you know, is that sooner or later? You know, our best view is when that we get the most benefit of that is closer to Q4, but we are seeing some signs that it could be, you know, modestly improving.
Got it. Got it. Thank you very much, Paul. Thanks, Steve.
Hans Chung with Balyasny, your line is open. Please go ahead with your question.
Hi, this is Hans Chung from Balyasny. I think my first question is just it is very encouraging like regarding your commentary on semiconductor business to go to outpace the WFE outlook this year. Can you kind of just elaborate like what's the underlying driver? Is more like the share gain story or it's more like we have the critical components to be available, so we're able to ship that to fill the unshipped backlog? Or it's just maybe it's new product ramps and something like that. Just if anything that would be helpful.
Yeah. Let me just answer your question in two parts, Hans. Your immediate question is, you know, what's driving our optimism for this year in our growth story as we go through the remaining quarters of 2022. That's simply tied to two things. You know, the first is we're expecting improved parts availability based on our activities. The second is our factory's operating tempo is quite good, and we expect to sustain that through the remainder of the year. I think that's really gonna drive our growth as we accelerate through the course of 2022.
When it comes to market share, you know, in our business in semiconductor, it tends to be over years that we measure market share because we are trying to win design slots in new equipment from the major equipment makers. If we win the slot, we keep that business for many years afterwards. The share really doesn't shift that much on a monthly or quarterly basis. It shifts over the course of years. What we're doing there is, you know, we're defending our current position in conductor etch, which is, you know, our strongest area, has been for quite some time. We're also planting seeds in new markets. We have new products that we've launched into the dielectric etch market, into the remote plasma source market, into the flat panel market.
We think that by doing this, we can increase our served market essentially, and really drive our growth in 2023 and 2024.
Got it. That's helpful. My next question, can you provide some colors around the end market in industrial, medical, or the data center, telecom? It seems like the implied same quarter guidance, basically, these combined will decline sequentially. Just want to know, like, all these gonna be declined sequentially, or if-
I think the only way to think about this, Hans, is that it's all a function of supply. You know, we have huge pent-up demand in all the markets you just mentioned, whether it's industrial, medical, data center, telecom, network, and you name it. We have a very solid order book in all of those markets. As we get parts, you know, we'll be able to you know, to maximize our output. This has nothing to do with demand. It's all about supply right now.
Hans? Operator, we're ready for the next question.
Are we still on the call?
Gentlemen, apologies for the delay. Once again, Mr. Chung, please re-signal to complete your question. We'll move forward to Graham Price with Raymond James.
Hey, good afternoon, and thanks for taking my question. I guess just quickly on the SL Power acquisition. You've highlighted the cross-selling and integration synergies there. Just wondering, kinda how quickly you see those playing out, and then, just more broadly, how the margins for the acquired business compare to the legacy business.
Yeah. Let me just make a comment about the integration and how we intend to exploit these sales synergies. First, you know, we've taken a very strong approach to integration. Immediately, the factories of SL Power are reporting directly into our chief operating officer, and their sales force is reporting directly to our chief sales officer. Then the remaining people at SL Power, the engineering, marketing, and support people are reporting to the former president of SL, who now has responsibility for all of the medical power products that AE makes. Not just the SL Power products, but also the Advanced Energy products. You know, together, we think that the unconstrained demand there this year is well over $100 million.
It's a good-sized business for us, and it makes us the top-tier player. You know, like I said in my script, we think the medical market is a good space for us. It's high mix, it's low volume, it's mostly sole source business, and that's right in our wheelhouse, essentially. What we're going to do moving forward is, you know, we're basically training our sales force, the SL Power sales force to sell AE products and the AE sales force to sell SL Power products. We have a particular focus on medical accounts, and a secondary focus on select industrial accounts.
We think, together, you know, we could do a very good job, you know, cross-selling because SL Power was strong at accounts where we weren't, and we're strong at accounts where SL Power wasn't. We think it's a very good match. I actually visited there, Friday last week. I went down to Calabasas and welcomed the SL Power team to Advanced Energy. You know, there's a lot of energy, a lot of positive energy, from the team down there. I think it's gonna be a very good match between Advanced Energy and SL Power.
Yeah, maybe just to comment on the business model. I'd say the financial profile, you know, coming out of the gate is very similar to Advanced Energy. They build pretty similar products. They're in differentiated markets. You look generally, we already mentioned operating margins are in the mid-teens. It's pretty similar to AE today. Gross margins are around 40%, so again, you know, pretty similar. As we combine the organizations, as Steve said, there's a lot of opportunity to grow the business. With that and the other integration actions, you know, there's opportunity to grow, I'll say, the bottom line or earnings, you know, probably faster even than the top line.
I think it's a very natural fit, and a lot of opportunity, you know, for us to grow in the medical market as we go forward.
Got it. Thanks. And then for my second one, just kind of a housekeeping one. You mentioned the income tax rate going forward will be 19%, which looks like just about the highest it's been in a few years. I'm just trying to get a little clarity on what's causing that.
Yeah, there was a change in the U.S. tax law that was effective at the beginning of the year, that essentially requires companies to capitalize their R&D expenses rather than to expense them. This was something that was put in place back in 2017 as part of the Tax Cuts and Jobs Act. You know, that became effective. Obviously, it didn't impact us as much in the first quarter because we had some other benefits. Looking forward, it's about a 400 basis point impact. You know, you can probably do some reading about it. It's affecting all companies, particularly technology companies. I think there's some hope over time that or maybe even an expectation that that will get rolled back or repealed. At this point, that's the current tax law.
That's what we've reflected going forward.
Understood. Thank you very much.
Gentlemen, if I could, I'd like to offer just one more opportunity for Mr. Chung to press star one to complete his question. We'll pause for just a moment. Mr. Chung, apologies for the audio issue earlier. Please go ahead. Your line is open once again, sir.
Okay. Yeah, just a quick one. Can you give us some sense about the cost margin impact from the high premium pitch for the second quarter? I know you gave the 180 basis points for first quarter, but what about second quarter?
Yeah, we didn't guide to that specifically, but in my prepared remarks, we said that we expected those premiums, you know, the premiums and related recoveries to be about the same as it was in Q1, the level of those things.
Okay, got it. Thank you.
Yep.
You're welcome. We have no further signals from the audience at this time. I am pleased to turn the floor back over to Mr. Steve Kelley for any additional or closing remarks.
Thank you, operator, and I'd just like to recap our key messages. First, demand for our products is very strong. Second, we are on track to deliver solid operating results in the second quarter and even better results in the second half. Finally, we are squarely focused on developing innovative technologies and products for our customers. Thanks for joining the call today.
Ladies and gentlemen, this does conclude today's Advanced Energy first quarter 2022 earnings call. We thank you all for your participation. You may now disconnect your lines. Have a great day.